Everything You Need To Know About TFSAs
A Tax-Free Savings Account (TFSA) is a flexible registered plan that lets you contribute throughout your lifetime, grow your savings tax free, and withdraw anytime you want tax free.
You can use a TFSA to save for any goal, from a dream vacation to a down payment or home renovation. It can supplement education and retirement savings, or even serve as an emergency fund. And you can switch up your TFSA’s goal as your needs change, without worrying about any tax consequences.
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How does a TFSA work?
TFSAs are all about saving money for your future, but they aren’t anything like a traditional savings account. You add money to a TFSA, and then you choose how to invest the money you’ve added. It’s better to think of a TFSA as a “plan” — more along the lines of a Registered Retirement Savings Plan (RRSP) that can hold multiple types of investments.
That said, with an RRSP you get a tax deduction when you contribute and your money is taxed as income when you withdraw. In contrast, with a TFSA you don’t get a tax deduction, but you can withdraw your money tax free. Even your heirs can receive the fair market value of your TFSA tax free when you pass.
What does "tax free" mean?"
The government set up TFSAs in 2009 to encourage people to save, and the big incentive is that you get:
Tax-free growth inside the account
Tax-free withdrawals from the account
Tax-free bequests to heirs
There are a few TFSA-related tax rules you should know about. There’s a 1% monthly tax on over-contributions, so stick to your contribution limit. There’s also a 1% monthly tax on contributions made in a year when you’re a non-resident, so don’t contribute if that’s the case.
In addition, the U.S. Internal Revenue Service (IRS) may levy a withholding tax on investors who are not U.S. residents when they receive dividends from U.S.-listed stocks or exchange-traded funds.
How do contributions work?
Every year, Canadians 18 or older get the same amount of new TFSA contribution room, adjusted to the nearest $500 based on inflation. Any contribution room you haven’t used yet doesn’t disappear. It simply rolls over to the following year.
In 2023, the limit is $6,500 — but if you were 18 or older in 2009 and have never contributed, you have $88,000 in cumulative contribution room.
Find your personal TFSA contribution limit on your latest Notice of Assessment. And keep in mind that while you can have as many TFSAs as you want, we recommend you stick with one because it makes tracking your contributions, and avoiding over-contributions, much easier.
How do withdrawals work?
You can withdraw from a TFSA anytime you want. You’ll pay no tax. And here’s a nice surprise: you don’t lose your contribution room forever as you do when you withdraw from an RRSP.
Instead, the amount of your withdrawal is added back to your contribution room on January 1 of the next calendar year. This means that, as soon as next New Year's Day, you can recontribute what you withdrew and start that money growing tax free.
What can you invest in?
Since one of the key benefits of a TFSA is that you don’t have to pay tax on investment growth, including capital gains, dividends and interest income, it’s a good idea to fill it with investments that grow. These can include everything from term deposits to stocks*, bonds*, exchange-traded funds* and mutual funds*.
What you choose will depend on how comfortable you are with market volatility and when you plan to withdraw your money. Your advisor can help you put together a TFSA investment portfolio that makes sense for you.
Ready to open your TFSA?
You can open your TFSA anytime on or after your 19th birthday. Drop by your local branch and we’ll get you all set up.
Already have a TFSA with another financial institution and want to move it? We can help you do that too.
Frequently asked questions
How much can I contribute to my TFSA?
On January 1, 2023, your TFSA contribution room got a boost of $6,500. That said, how much you personally can contribute to your TFSA depends on how long you’ve been accumulating room and how much you’ve already contributed and withdrawn. Here’s a simple way to calculate your personal limit:
Check your 2022 Notice of Assessment to see how much room you had then.
Add this year’s contribution limit (2023’s limit is $6,500).
Subtract any contributions you made after you filed your taxes last year.
Add any withdrawals you made between the time you filed your taxes and December 31, 2022.
Do I get my contribution room back after I withdraw from a TFSA?
Yes, that’s one of the great things about TFSAs. When you withdraw, the entire amount you take out of your TFSA is added back to your TFSA contribution room. You don’t get that extra contribution room right away, though. Before recontributing, you’ll need to wait until January 1 of the next calendar year — unless you still have enough unused contribution room available.
How does a TFSA compare to an RRSP?
Here’s a look at some of the key features of TFSAs compared to RRSPs:
Can I have more than one TFSA?
Yes, you can open multiple TFSAs. However, that doesn’t mean you’ll have more room to contribute, because contribution room is calculated for each person, not each account. One reason you may want more than one TFSA is to separate savings for different goals. Just keep in mind that the more TFSAs you have, the more complicated it gets to track contributions and withdrawals.
Can a TFSA be a joint account with a spouse or within a family?
No, a TFSA belongs to one person and cannot be held jointly. While there are spousal RRSPs, there’s no such thing as a spousal TFSA. Only you can contribute to your TFSA. That said, you can give your spouse and family members money to contribute to their own TFSAs if they have contribution room available.
What do I need to open a TFSA?
You need to be 19 or older to open a TFSA. You’ll need to provide us with your social insurance number and proof of your date of birth, so we can register your TFSA with Canada Revenue Agency. You can choose to make a first deposit on the spot or open the account so it’s ready when you are.
Disclaimer
*Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Unless otherwise stated, mutual fund securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions.
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