Introduced by the Canadian government in 2009, Tax-Free Savings Accounts (TFSAs) were designed to encourage Canadians to save and invest more. These registered accounts offer a wide range of investment options—such as cash, GICs, stocks, and bonds—while allowing any earnings to grow tax-free.
Although TFSAs share some similarities with RRSPs, they have key differences, particularly regarding tax treatment and contribution limits.
We’ll cover how TFSAs work, the rules around contributions and withdrawals, and how they compare to other investment accounts.
Key Takeaways
- A TFSA is a registered tax-advantaged savings account that holds a variety of investment types but doesn't require paying taxes on interest, dividends, or gains of any kind.
- All the big banks in Canada offer TFSAs, as do many smaller institutions.
- There are annual contribution limits for TFSAs and the 2024 limit is $7,000.
- TFSAs are often compared to RRSPs, but other common alternatives include RESPs, FHSAs, and HISAs.
How does a TFSA work?
Canadians are only allowed to contribute a certain amount of money to their TFSA each year, and there's a lifetime limit as well. The lifetime limit is simply the sum of the annual limits every year after you turn 18.
While there's only so much money you can deposit, there's no limit on how much your TFSA investments can earn. You don't pay any taxes on the growth your investments experience in a TFSA.
The best part? You can withdraw any amount from your tax free savings account at any time, without having to pay taxes on that withdrawal. Plus, you'll be able to contribute that much back into your TFSA at a later date.
Making the the most of your TFSA
The best way to make the most out of your TFSA is to use it. This involves 3 primary steps:
- Contribute as much as you're able
- Make sure that money is in investments that will grow over time
- Leave it there
For example, if you have short-term investments in your TFSA, such as in a GIC, you might reinvest that money when it pays out, keeping that new GIC or other investment in your TFSA where it can continue to grow tax-free.
The goal is to build the money in your TFSA up as much as possible (within your personal risk tolerances) so you can enjoy that tax-free income later in life, when you need it to make a major purchase (such as buying a house or retirement property), or to give you some income when you want to finally retire.
Pros and cons of a TFSA
TFSAs offer a wide range of benefits, making them a popular choice for many Canadians looking to save and invest. However, like any financial tool, TFSAs come with their own set of advantages and drawbacks. Here’s a closer look at the benefits and limitations of this versatile account:
Pros
- Tax-free growth: This allows your money to grow fast without the burden of paying taxes on it.
- Flexible withdrawals: You can withdraw your funds from your TFSA at any time, for any reason, without paying taxes on the withdrawals.
- No impact on government benefits: Withdrawals don’t count as income, so they won’t affect your eligibility for government programs like Old Age Security.
- Contribution room rolls over: If you don’t use all of your contribution room in a given year, it carries forward indefinitely.
- Variety of investment options: TFSAs offer various investment options, from cash and GICs to stocks, bonds, and mutual funds.
Cons
- Contribution limits: There are annual contribution limits, and over-contributing can result in penalties.
- No immediate tax deductions: Unlike RRSPs, contributions to a TFSA are not tax-deductible.
- Not ideal for large retirement savings: While TFSAs are excellent for many types of savings, they may not be the best option for large-scale retirement savings if you rely on tax deductions to reduce your current taxable income.
Big bank TFSA comparison
You can open a TFSA and start investing with all of Canada's big banks – they all offer a similar array of TFSA investment products, such as GICs, mutual funds, and various investment portfolio solutions.
Here's a side-by-side look at the TFSAs offered by these banks, including their self-directed options:
| BMO | CIBC | Scotiabank | RBC | TD | |
|---|---|---|---|---|---|
| Cash investments | Yes | Yes | Yes | Yes | Yes |
| GIC investments | Yes | Yes | Yes | Yes | Yes |
| Stock investments | Yes | Yes | Yes | Yes | Yes |
| Bond investments | Yes | Yes | Yes | Yes | Yes |
| ETF investments | Yes | Yes | No | No | Yes |
| Mutual fund investments | Yes | Yes | Yes | Yes | Yes |
| Portfolios | Yes | Yes | Yes | Yes | No |
| Self-directed platform | BMO InvestorLine | CIBC Investor's Edge | Scotia iTRADE | RBC Direct Investing | TD Direct Investing |
How to start a TFSA
To start a TFSA, you simply contact your preferred bank, open a TFSA, and add cash or investments to the account. Every Canadian starts to accumulate TFSA contribution room the year they turn 18 (or since 2009, depending on your age) and every year after, as long as they're a resident of Canada and have a valid SIN.
For the sake of simplicity, most Canadian banks and financial institutions label eligible investments with "TFSA," such as TFSA GICs, or TFSA Savings Accounts, etc. You can have as many TFSA products as you like, but you must stay within your annual and lifetime contribution limits. There are overcontribution rules to consider, too, which we'll dive into later.
Your financial institution will report your TFSA investments to the government, so it's all pretty straightforward. This is why you'll need a valid SIN to invest in your TFSA.
As an alternative to this approach, you could try a self-directed TFSA. This means you manage your investments yourself, providing more flexibility.
You can start a self-directed TFSA on most self-directed investment platforms in Canada. Wealthsimple Self-Directed Investing, for instance, is highly rated, easy to use, and doesn't charge commission, withdrawal, inactivity, or maintenance fees.
While you may have heard of Wealthsimple, did you know that Wealthsimple also offers Wealthsimple Self-Directed Investing? And it’s a little different. They advertise it as “a simpler way to trade,” and it’s hard to argue with that. You can only open a handful of account types. You can trade stocks, ETFs, options, margin, and corporate products on Canadian and U.S. exchanges. And that’s about it.
- Well designed and easy to use app
- Trade on Canadian and U.S. exchanges
- CIPF protection up to $1,000,000
- No minimum account balance
- Market + 1.5% fee for currency conversion
- There are some fees for particular things
- Focus on simplicity and ease of use
- Search and track stocks with a watchlist
- Personal
- TFSA
- RRSP
- LIRA
- FHSA
- RESP
- RRIF
- Non-registered
- Corporate
- Margin
- Stocks
- ETFs
- Options
- Crypto
- Margin
Types of TFSA investments
So, what types of investments can you designate as part of your tax free savings account? Unsurprisingly, it turns out it's the same types of investments you can hold in your RRSP.
Here's a short list with the general pros and cons of each.
| TFSA Investment type | Pros | Cons |
|---|---|---|
| Savings Account | * Keeps your money liquid and easy to get at | * Usually very low returns |
| GICs | * Guaranteed returns | * Low risk generally means low reward * Your money is locked up for an extended period of time |
| Bonds | * Relatively safe over time * Can provide you with periodic payments throughout the term * Lots of term lengths available | * Lower returns than you might get with stocks |
| Stocks | * Works just like regular stock investments, except returns are not subject to capital gains tax | * Riskier than other TFSA investment types |
| Mutual Funds | * Can be adjusted to fit your personal risk tolerance level * Generally higher returns than safer investments * Not as risky or volatile as regular stock investing * Professionally managed | * Still subject to management fees |
| ETFs | * Similar to mutual funds, only with lower fees | * Generally slightly lower potential reward * Still subject to management fees |
Contributing to and withdrawing from your TFSA
The federal government designates an annual TFSA contribution limit each year, and this limit is then the amount that's added to every eligible Canadian's lifetime TFSA contribution limit. The following year's contribution limit is typically announced in December.
Here's an overview of the annual limits since 2009:
| Year | Annual TFSA limit |
|---|---|
| 2009 | $5,000 |
| 2010 | $5,000 |
| 2011 | $5,000 |
| 2012 | $5,000 |
| 2013 | $5,500 |
| 2014 | $5,500 |
| 2015 | $10,000 |
| 2016 | $5,500 |
| 2017 | $5,500 |
| 2018 | $5,500 |
| 2019 | $6,000 |
| 2020 | $6,000 |
| 2021 | $6,000 |
| 2022 | $6,000 |
| 2023 | $6,500 |
| 2024 | $7,000 |
| 2025 | $7,000 |
Remember that your individual contribution room is either based on when you turned 18 or when the TFSA product was first introduced in 2009 – whichever came first.
So, if you turned 18 in 2014, your lifetime contribution limit was $44,000 in 2020. With the 2024 TFSA contribution limit at $7,000, your lifetime contribution limit increases to $102,000.
TFSA withdrawals
You can withdraw from your TFSA at any time and don't have to pay any taxes for doing so. If you do make a withdrawal, you get that contribution room back, so you can put that money back into your TFSA at a later time.
However, it's important to note that making a withdrawal doesn't add to your available contribution room in the same year you make the withdrawal. This extra contribution room will only be added to your TFSA the following year.
What happens if you over-contribute to a TFSA?
If you over-contribute to a TFSA, the Canada Revenue Agency will impose a penalty. The penalty is a 1% tax on the excess amount for each month the over-contribution remains in the account.
For example, if you contribute $2,000 over the limit, you would be charged 1% of that $2,000 each month until the excess contribution is withdrawn or applied to the following year’s contribution limit.
It’s important to track your contributions carefully, as the annual TFSA contribution limit can vary, and unused contribution room from previous years can be carried forward. Always keep an eye on your contribution room to avoid these penalties. You can view how much contribution you have in your CRA My Account.
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Tax free savings accounts are only one type of registered savings plan, but there are several others available that offer value for Canadians – one particular favourite is an RRSP, which has several similarities to a TFSA.
Here's a comparison of several of the RSPs available to Canadians, along with one non-registered option:
| Account type | Details | Example |
|---|---|---|
| Tax Free Savings (TFSA) | * Earns tax free income through investments * Contributions aren't tax deductible * Withdrawals aren't counted as taxable income * Has annual and lifetime contribution limits | Questrade TFSA |
| Registered Retirement Savings Plan (RRSP) | * Earns taxable income for retirement * Contributions are tax-deferred * Withdrawals count as taxable income * Has annual and lifetime contribution limits | Desjardins RRSP |
| Registered Education Savings Plan (RESP) | * Builds savings for your child's post-secondary education * Contributions aren't tax deductible * Educational Assistance Payments (EAPs) are counted as taxable income for the student * Eligible for grants from the Government of Canada * $50,000 lifetime contribution limit per child | Questwealth RESP |
| FHSA | * Designed to save for a down payment on a new home * Contributions are tax-deductible * Your savings grow tax-free * $8,000 annual contribution limit, $40,000 lifetime contribution limit * Can withdraw penalty-free when purchasing a home, but non-qualifying withdrawals are taxed | EQ Bank FHSA Savings Account |
| HISA | * Builds savings at a high interest rate * Interest rates vary by institution * Profits are considered taxable income * No contribution or withdrawal limits | KOHO Earn Interest |
RRSP vs TFSA
Many Canadians wonder whether they should invest with an RRSP or a TFSA, but since both serve different purposes and are taxed differently, having both can be a valuable investment.
| Registered account | Contributions | Withdrawals |
|---|---|---|
| RRSP | Contributions are tax deductible. | You pay income tax on money you withdraw. |
| TFSA | Contributions are not tax deductible. | You don't pay income tax on money you withdraw. |
As you can see, the biggest difference between RRSPs and TFSAs is how they're taxed. RRSP contributions are tax deductible and you pay income tax on the funds you withdraw, but TFSAs are the opposite – contributions aren't tax deductible and you're not taxed on withdrawals.
Putting money into your RRSP can save you money now since RRSP contributions are tax deductible. When you're in your prime earning years, you can save a lot of money on income tax by maximizing your RRSP contributions.
And while RRSP withdrawals are taxable, the idea is that you'll make those withdrawals when you're retired and are in a much lower tax bracket. By paying taxes on that money when you're in a lower tax bracket, you'll save on how much income tax you pay overall.
On the other hand, while TFSA contributions are not tax deductible, you don't pay taxes on any withdrawals in the future, saving you taxes on whatever gains your TFSA investments made.
FAQ
What is a TFSA?
TFSAs were created by the Canadian government in 2009 to give Canadians a way to earn tax-free investment income. They are similar to RRSPs but the contribution limits and tax details are a bit different.
How do TFSAs work?
TFSA holders can contribute funds and investments throughout the year, as long as they don't go over the annual limit. There aren't any taxes levied on your TFSA earnings and you can withdraw funds at any time without paying taxes.
How is a TFSA different from an RRSP?
TFSAs and RRSPs are both registered savings plans but there are a few key differences. First, RRSP contributions are tax-deductible while TFSA contributions aren't. Also, RRSP withdrawals are taxed as income but TFSA withdrawals are tax free.
What's the 2024 TFSA contribution limit?
The 2024 TFSA contribution limit is $7,000, which is up $500 from the 2023 limit of $6,500. The contribution limit changes nearly every year, so be sure to monitor the contribution limit every year you hold a TFSA.
How is a TFSA different from a HISA?
HISAs are not registered savings plans while TFSAs are. Plus, TFSAs can hold any number of different investments that grow in a tax-free environment while HISAs are simply savings accounts with a higher-than-normal interest rate.
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