A Tax-Free Savings Account (TFSA) is a way for people in Canada to save money without paying taxes on what they earn inside the account. The TFSA program began in 2009, and it’s open to anyone who is 18 years or older and has a valid Social Insurance Number (SIN). Once you open a TFSA, the money you contribute to it can grow, and any interest or profit you earn won’t be taxed—even when you take the money out.
But there are rules and limits about how much you can put into a TFSA, and it’s important to understand them. This guide will explain how TFSAs work, how to open one, and how to manage your money in a TFSA so you can take advantage of this great savings tool.
Why is a TFSA Important?
A TFSA is important because it helps you grow your savings faster than a regular savings account. Usually, when you earn interest or make profits from your investments in a regular account, you have to pay tax on that income. But with a TFSA, all of your earnings are tax-free. This means you can keep all the money you earn and use it for whatever you need—whether that’s a vacation, a home, education, or even retirement. It gives you a tax-free way to grow your money.
Key Benefits of a TFSA
There are several reasons why people love using TFSAs:
- Tax-Free Growth: Any money you earn inside a TFSA, like interest, dividends, or capital gains, is tax-free.
- Flexible Withdrawals: You can take out your money from a TFSA at any time without paying tax or penalties.
- No Impact on Government Benefits: Taking money out of your TFSA doesn’t reduce government benefits like the Old Age Security (OAS) or the Canada Child Benefit (CCB).
- Multiple TFSAs: You can have more than one TFSA, but the total amount you contribute across all accounts must not exceed your annual contribution limit.
- Flexible Use: You can use your TFSA for any savings goal—whether that’s an emergency fund, saving for a big purchase, or investing for the long term.
How to Open a TFSA
Opening a TFSA is easy. Follow these steps:
1. Choose a Financial Institution
You can open a TFSA at most banks, credit unions, insurance companies, or online brokers. Some examples include big banks like TD, RBC, or Scotiabank. You can also use online services like Wealthsimple or Questrade.
2. Provide Your Information
When you open a TFSA, you’ll need to provide your Social Insurance Number (SIN) and your date of birth. The financial institution uses this information to register your TFSA with the government. If they don’t register your account properly, it won’t count as a TFSA, and you might have to pay tax on your earnings.
3. Decide What Type of TFSA You Want
There are three main types of TFSAs you can open:
- Deposit TFSA: This works like a regular savings account where you earn interest.
- Annuity Contract TFSA: A contract where you pay money in exchange for regular payments in the future.
- Trust Arrangement TFSA: This is often used for investment accounts, where you can hold things like stocks, bonds, or mutual funds.
Depending on your financial goals, you may want to pick one type over the other. Your bank or financial advisor can help you choose the right option.
4. Contribute to Your TFSA
Once your TFSA is open, you can start adding money to it. You can deposit money in one lump sum or make regular contributions, depending on what works best for you.
TFSA Contribution Limits
Each year, there is a limit on how much money you can contribute to your TFSA. This is called your TFSA contribution room. The contribution limit for 2024 is $7,000. But if you didn’t max out your TFSA in previous years, any unused contribution room carries over to future years.
For example:
- If you turned 18 in 2010 but never opened a TFSA, your contribution room will be the total of all the annual limits since then. So, by 2024, your available room could be over $88,000 if you haven’t contributed yet!
It’s important to keep track of your contribution room because if you go over the limit, you’ll have to pay a penalty of 1% per month on the excess amount until you withdraw it.
How to Check Your Contribution Room
You can check your TFSA contribution room by logging into the Canada Revenue Agency (CRA) My Account online service, or by checking your Notice of Assessment after filing your taxes.
Withdrawals From a TFSA
One of the best things about a TFSA is that you can take your money out anytime, for any reason, without paying tax on the amount you withdraw. There are no restrictions on how much or how often you can withdraw money.
Plus, any money you take out will be added back to your contribution room for the next year. So, if you take out $5,000 in 2024, you’ll be able to re-contribute that $5,000 in 2025, in addition to your regular annual limit.
Example:
Let’s say you have $20,000 in your TFSA and you take out $3,000 for a vacation. Next year, your contribution room will be increased by $3,000, allowing you to put that money back in if you want.
Types of Investments You Can Hold in a TFSA
A TFSA isn’t just for holding cash. You can invest in a variety of assets to help grow your money faster. Here are the types of investments you can hold in a TFSA:
- Cash – You can use your TFSA like a regular savings account.
- Mutual Funds – A pool of money managed by professionals that invests in a variety of assets.
- Stocks – Shares of individual companies that can grow in value or pay dividends.
- Bonds – A way to lend money to governments or companies and earn interest.
- Guaranteed Investment Certificates (GICs) – A safe investment that guarantees your original investment and interest.
- Exchange-Traded Funds (ETFs) – A group of stocks or bonds that you can trade on a stock exchange.
You can choose how to invest your TFSA based on your goals. Some people use it for safe investments like GICs or bonds, while others use it for higher-growth investments like stocks or mutual funds.
Self-Directed TFSAs
A self-directed TFSA allows you to manage your own investments. Instead of your bank choosing what to invest in, you get to decide. This is great for people who are comfortable with investing and want more control. You can buy and sell investments like stocks, bonds, and ETFs, depending on your goals.
How to Open a Self-Directed TFSA
To open a self-directed TFSA, you need to find a broker who offers this service, like Questrade or Wealthsimple. You’ll manage your own investments, but you can still benefit from the tax-free growth inside the TFSA.
Who Can Open a TFSA?
You can open a TFSA if:
- You’re 18 years old or older,
- You have a valid Social Insurance Number (SIN), and
- You’re a Canadian resident.
Even if you’re living outside of Canada but have a valid SIN, you can keep your TFSA. However, you can’t contribute to it if you’re a non-resident, and any contributions while non-resident will be taxed at 1% per month.
Can You Have More Than One TFSA?
Yes! You can have multiple TFSAs. For example, you might have one TFSA at your bank for short-term savings and another TFSA with an online broker for long-term investments. The important thing to remember is that your total contributions across all TFSAs cannot go over your annual limit.
How Does a TFSA Affect Your Government Benefits?
One of the greatest benefits of a TFSA is that it won’t affect your government benefits.
Money you earn in a TFSA doesn’t count as income. This means it won’t reduce the benefits you get from government programs like:
- Old Age Security (OAS),
- Guaranteed Income Supplement (GIS),
- Employment Insurance (EI), and
- Canada Child Benefit (CCB).
So, even if you’re earning income from investments inside your TFSA, you don’t have to worry about losing any government benefits.
Using a TFSA for Retirement
Although many people think of TFSAs as short-term savings accounts, they can be a powerful tool for retirement savings as well. Unlike a Registered Retirement Savings Plan (RRSP), you don’t get a tax deduction when you contribute to a TFSA, but you can take money out tax-free at any time.
This makes a TFSA a great option if you want more flexibility in your retirement savings. You can take money out when you need it without worrying about being taxed on it, and you can use it alongside other retirement income like pensions or RRSP withdrawals.
TFSA and Estate Planning
What happens to your TFSA when you pass away? You can name a successor holder or a beneficiary to receive the money in your TFSA when you die.
- A successor holder is usually your spouse or common-law partner. If you name them, they will take over the TFSA without any tax consequences, and the TFSA continues to grow tax-free.
- A beneficiary can be anyone else you choose. They will receive the money in the TFSA, but any income earned after the date of death may be taxable.
It’s important to update your TFSA beneficiary information, especially if your circumstances change (like getting married or divorced). Your financial institution can help you update this information.
Can Non-Residents Open a TFSA?
If you’re living outside Canada, you may still be able to hold a TFSA if you have a valid SIN and opened the account while you were a resident. However, you won’t be able to add more money to your TFSA while living outside the country. If you do contribute as a non-resident, you’ll face a penalty tax of 1% per month on the contribution until it’s withdrawn.
Non-residents can keep their TFSAs open, and they don’t pay taxes on earnings in the account. But no new contribution room will be added for any years during which you are a non-resident.
Conclusion
A Tax-Free Savings Account (TFSA) is a flexible and powerful tool for saving money, growing investments, and even planning for retirement. With the ability to grow your savings tax-free, withdraw money without penalties, and use it for any goal, the TFSA is a must-have for Canadians.
Whether you’re saving for a big purchase, planning for retirement, or just looking for a smart way to grow your money, a TFSA can help. Remember to stay within your contribution limits, choose investments that fit your goals, and take advantage of the tax-free growth your TFSA offers.
For more information about how a TFSA can work for you, talk to your financial planner, and start building your tax-free savings today! Also, feel free to grab a copy of The Art of Retirement, which will help you on your path to an effective retirement plan.
