However, there is some confusion around what a TFSA is, exactly. In fact, around a quarter of Canadians don’t know the difference between a TFSA and a Registered Retirement Savings Plan (RRSP). In this article, we’ll cover everything you need to know about the TFSA, and answer key questions, such as; what is a TFSA; how do TFSAs work; what are TFSA withdrawal rules; what is the TFSA contribution limit; and is a TFSA right for you?
How do TFSAs work?
When it was launched in 2009, the Tax-Free Savings Account was designed to allow Canadians aged 18-plus to save without having to pay any tax on the income and/or growth earned within the account (this income could be from interest, dividend payments and capital gains — which is when an investment increases in value).
You can hold a wide variety of investments in a Tax-Free Savings Account, not just cash: these include stocks, bonds, mutual funds and exchange-traded funds. You can withdraw from your TFSA at any time without paying any tax.
Each year, the Government of Canada decides on the maximum TFSA contribution amount for the year. If you don’t contribute the full TFSA contribution amount in any given year, the remaining amount is added to your contribution limit for the following year.
Unlike with an RRSP, you don’t get an immediate tax benefit from saving in a TFSA (when you contribute to an RRSP, the amount you contribute reduces your taxable income, which typically reduces the amount of tax you need to pay in any year that you make RRSP contributions).
However, when you withdraw money from your TFSA, you don’t pay any tax on it (unlike with an RRSP, where withdrawals are treated as income, and you’re taxed according to your tax bracket). Also, any amount you withdraw from a TFSA is added to your contribution limit for the following year (except for qualifying transfers and specified distributions).
What is the TFSA contribution limit?
When TFSAs were introduced in 2009, the annual TFSA contribution limit was $5,000. However, the contribution limit increases according to inflation, in increments of $500. The TFSA contribution limit for 2024 was $7,000; anyone who was 18 or older in 2009 would have a combined total TFSA contribution room of $95,000 in 2024 (if they’d been a Canadian resident all of that time).
Therefore, if you haven’t contributed to a TFSA before, $95,000 would be your TFSA contribution limit in 2024 (if you were aged 19-plus in 2009). Otherwise, your contribution room would start in the year you turned 18 (and grow every year if you don’t make the full contribution amount).
You can find out how much TFSA contribution room you have personally by using our TFSA calculator.
Alternatively, you can log into My Account on the CRA website (though it doesn’t reflect any contributions or withdrawals from the current year). Any additional income earned in your account, such as through interest, capital gains and dividends, will not affect your TFSA contribution room.
What is the TFSA penalty for excess contributions?
It’s important to be aware of your TFSA contribution limit, as there are fairly hefty penalties if you over-contribute. You’ll pay an additional 1% in tax per month on the amount of the excess contribution.
So, for example, if you have a contribution limit of $7,000 for 2024 but put $10,000 into your Tax-Free Savings Account on July 1 and leave it there for the rest of the year, you’ll pay:
$3,000 x 0.01 x 6 months = $180
This penalty continues until you withdraw the excess TFSA contribution amount.
Who can open a TFSA?
Any Canadian resident aged 18-plus who has a valid Social Insurance Number is eligible to open a TFSA. And there is no age limit to TFSA contributions; you can continue contributing for as long as you live.
If you leave the country, you can keep your TFSA open, your savings/investments can continue to grow tax free and you can make withdrawals from it, but you can’t contribute to it while you’re away.
If you do make TFSA contributions while no longer a Canadian resident, you’ll have to pay a 1% tax for each month that the contribution is in your TFSA. Also, while you’re away, your TFSA contribution room will not grow during any year when you’re not a resident.
What investments can you hold in a TFSA?
You can have much more than just cash in your TFSA, and to make the most of this savings account, it makes sense to hold investments within it. Investments such as certain mutual funds and company shares can have much greater growth potential than interest from a savings account, so it pays to look beyond cash.
You can include the following investments in your TFSA:
- Cash savings accounts.
- Guaranteed Investment Certificates (GICs).
- Government and corporate bonds.
- Mutual funds.
- Exchange-traded funds (ETFs).
- Individual stocks listed on designated stock exchanges.
Be sure not to include any non-qualified investments in your TFSA because this could bring negative tax consequences. Your financial advisor or financial institution can help ensure you only hold qualified investments in your TFSA.
What are the TFSA withdrawal rules?
In general, TFSA withdrawal rules are pretty lenient: you can typically withdraw any amount from your Tax-Free Savings Account, at any time, for any reason. The amount you withdraw will be added to your TFSA contribution limit for the following year.
You can only recontribute the amount you withdraw in any given year if you have available TFSA contribution room. If not, you would have to wait until the following year to recontribute that amount. If you do recontribute more than your available contribution room in that same year, you’ll have to pay a penalty for excess TFSA contributions, as outlined above.
What is a TFSA’s tax advantage?
Unlike with RRSP contributions, you can’t deduct your TFSA contributions from your income, for tax purposes. However, any growth of your savings held in a TFSA is tax free. This means any interest you receive, any dividends you receive and any capital gains that your investments make won’t be taxed.
Given that your gains aren’t taxed, your money will enjoy even greater growth through compound returns, as there is a larger base of money to grow or earn income from.
A big tax advantage of a TFSA is that you pay zero tax on any withdrawals, no matter when you withdraw them or for what reason.
Using a TFSA as a retirement savings tool
The Tax-Free Savings Account has grown in importance as a retirement planning tool in recent years. It’s a great way to supplement retirement savings for anyone who maxes out their RRSP contributions, as TFSA savings also grow tax free.
The tax-free withdrawals from a TFSA can be really beneficial when it comes to providing income in retirement, as income from a TFSA can help reduce your overall retirement tax burden.
And, because TFSA withdrawals are not considered income, they won’t bring about any clawbacks for government retirement benefits, such as Old Age Security.
The pros and cons of TFSAs
As with any savings and investing accounts, TFSAs have both advantages and disadvantages:
Pros of TFSAs:
- Your savings grow tax free.
- You can withdraw from a TFSA at any time, for any reason.
- Any withdrawals are added to your contribution limit the following year.
- Contribution room grows every year.
- You don’t need to report contributions or withdrawals on your tax return.
- TFSA withdrawals won’t impact other benefits, such as Old Age Security.
- The contribution limit is the same for everyone, regardless of your income.
- You can save in a TFSA over your whole lifetime.
Cons of TFSAs:
- You don’t get an immediate tax benefit from contributing to a TFSA, as you would with an RRSP.
- Creditors can lay a claim to your TFSA savings.
- If you over-contribute, you’ll have to pay a tax of 1% of the over-contribution amount, per month.
- If any investments in your TFSA lose value (such as company shares or a mutual fund) you can’t use those losses to offset gains from other investments.
TFSA vs. RRSP
Given that many Canadians are confused about the differences between the TFSA vs. RRSP, let’s explore how the two savings vehicles compare with each other.
Registered Retirement Savings Plans (RRSPs) are designed to provide you with income when you retire and are therefore a long-term savings vehicle. You get an immediate tax break when you contribute to an RRSP (your taxable income is reduced by the amount of your contribution), but you’ll be taxed when you withdraw money from an RRSP.
Withdrawing from an RRSP is a much stricter and more complex process than withdrawing from a Tax-Free Savings Account. Most people transfer their RRSP investments/savings to a Registered Retirement Income Fund (RRIF) or an annuity (a financial product that provides you with a regular income during retirement). Any withdrawals from a RRIF or an annuity are classed as taxable income, plus there are strict rules in place as to how much you can withdraw from a RRIF (find out more about turning investments into retirement income).
You typically need to wait until you retire to withdraw money from your RRSP (unless it’s to use the money to buy a first home or pay for your education). Early withdrawals are typically subject to a withholding tax and they have to be reported as income on your tax return.
The main similarity between a TFSA and an RRSP is that your savings and investments grow tax free while they remain in the plan.
While you won’t get an immediate tax break when you contribute to your TFSA, you won’t be taxed when you withdraw from it, and you can withdraw any amount, at any time, for any reason. RRSP withdrawals are considered taxable income.
If you withdraw money from an RRSP, you permanently lose that contribution room, but with a TFSA any withdrawals are added to the following year’s contribution limit.
You can contribute to a TFSA your whole life, whereas you have to stop contributing to an RRSP at age 71.
Another key advantage of the RRSP vs. TFSA is that investments in an RRSP are protected from any creditors, whereas those held in a TFSA are not. If you go through a bankruptcy, creditors could come after your TFSA investments but can only lay claim to RRSP contributions made in the last 12 months.
Common TFSA FAQs
How much should I invest in a TFSA?
To take full advantage of tax-free growth of investments in a TFSA, you should try and save the full contribution amount every year. If you still have contribution room, it makes little sense to save or invest in a non-registered account. Also, if you’re in a low tax bracket, saving in a TFSA could make more sense than saving in an RRSP. Find out more about RRSPs vs. TFSAs.
What is the TFSA contribution limit?
The TFSA contribution limit was increased to $7,000 in 2024. However, you may be able to contribute more, depending on how much you contributed in previous years. You can find the amount of your contribution room for the current tax year by using our TFSA calculator or by logging into My Account on the CRA website.
Can I only put cash into a TFSA?
No, you can hold a wide range of investment products in a TFSA, including shares, bonds, mutual funds and exchange-traded funds (ETFs).
Can I open a joint TFSA with my spouse?
No, TFSAs can only be held by individuals. However, you can give money to your spouse for them to save in their TFSA, with no tax consequences. You should name each other as the successor holder for your TFSA: then, if one of you dies, the TFSA can transfer to the surviving spouse with no tax consequences.
Can I have several TFSAs?
Yes, you can, and with different financial institutions. But make sure that the total contribution for all of them doesn’t go over your TFSA contribution limit.
How do I open a TFSA?
Most financial institutions can help you to open a TFSA. Your IG Advisor can also help you to open one, along with giving you recommendations on the investments to include in it.
Is a TFSA right for you?
A TFSA is an excellent savings and investment account that should be a part of most Canadians’ financial plan. If you have money to save, it makes no sense to not save it in a TFSA. After all, your money will grow tax free, which can help your savings grow much faster.
A TFSA can also play a useful role in your retirement planning. Talk to an IG Advisor to discover the most effective way of making TFSA investments an integral part of your financial plan. If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).
