Ever wondered why you get a T5 slip from your financial institution each year, even when you don't have any investments with them? You pay taxes on the interest earned, even from a regular savings account. If this has you feeling like you’re paying more than you’re earning, it might be time to explore a smarter option: the tax-free savings account (TFSA).
What is a TFSA, exactly? Simply put, it’s a registered investment account that allows your money to grow tax-free. Unlike a typical savings account, you don't pay taxes on the interest earned.
It’s also incredibly versatile — you can use it to save for any financial goal, whether it’s a vacation, home renovation, or a new vehicle. Think of it as a tool to deposit money and watch it work for you.
Benefits of Having a Tax-Free Savings Account
Tax-free savings accounts give you an edge when it comes to taxes. It's one of the simplest ways of earning tax-free interest to save for an early retirement or a big “life-goal” purchase like a house, a boat, or that dream car you've been eyeing.
Here’s how: the money you deposit to your account has already been taxed. This means when the time comes to withdraw your savings, you can do so completely tax-free.
There is, however, a limit on how much money you can deposit in your account annually. So, you'll need to keep track of your contributions and withdrawals. The total contribution can’t be more than what's allowed in your TFSA contribution room for that year. Even if you withdraw money from your account, your TFSA contribution room stays the same.
Let's say your contribution limit for the year was $6,000.
You deposit $6,000 to your tax-free savings account in April.
You take out $4,000 in June, leaving you with $2,000 in your TFSA.
You might think you can still contribute $4,000 before the end of the year for a $6,000 TFSA balance. However, that's not the case. Your $6,000 deposit in April counts towards this year’s contribution. Now, you can see why keeping track of contributions is important. The good news is any amount you withdraw will be added to your TFSA contribution room for the following year.
The TFSA contribution limit for 2024 and 2025 is $7,000. If you over-contribute, you will be charged a penalty of 1% per month on the amount in that savings account.
How Does a TFSA Work?
Here are some requirements and account details to help you better understand how your TFSA works:
TFSAs are available to any Canadian resident aged 18 and older with a Social Insurance Number (SIN).
You can contribute up to $7,000 annually, but this limit can vary each year based on adjustments for inflation. The interest gained isn't taxable.
TFSA contributions aren’t tax deductible, unlike with a Registered Retirement Savings Plan (RRSP).
You don’t have to pay tax on any withdrawals. If you don't contribute $7,000 within a year, you can carry it forward to the next year.
You can make multiple withdrawals over a year. Any amount you take out will be added to your TFSA contribution room for the following year.
You earn interest on your interest! This is called compounding interest, and it helps your money grow tax-free faster.
What is a TFSA Used For?
A TFSA may have different uses for different age groups. Here are the most common reasons people are likely to make their contributions based on where they are in life:
Young adults can save up for their first car, first home, or education.
Middle-aged adults may use a TFSA to store emergency funds, save for a family vacation, or save to support their child’s education.
Senior adults typically use this savings option to get an extra income stream to complement their RRSP. It’s also a good investment to pair with a RRIF.
Who is Eligible for a TFSA?
A TFSA has rather inclusive eligibility criteria. This savings account is a powerful tool for boosting savings for most Canadians. Any Canadian resident aged 18 or older with a Social Insurance Number is eligible to open this account.
TFSAs can also be used by anyone regardless of their financial situation. For example, if you have a lower income, you can withdraw extra cash from your TFSA with no impact on other financial assistance or benefits programs you’re a part of. If you have a higher income, a TFSA can be a wonderful way to enhance your savings plans for retirement.
Getting started is simple. You’ll just need to provide your Social Insurance Number and valid identification documents. Contact us today!
Are Non-Residents of Canada Eligible for TFSAs?
To open a TFSA, you must have a valid SIN and identification documents. If you have a TFSA but become a non-resident, i.e., you move to a different country, your account may remain open and retain its tax-free status. However, no new contributions can be made, and no contribution room will accumulate.
If you make a contribution to your account while being a non-resident, you’ll be taxed a 1% monthly fee to have your funds stored in a TFSA. This penalty will continue to apply until a Canadian residency status is re-established. You might also be liable to other forms of taxes.
While you’re a non-resident, your TFSA contribution room will not grow. This means you won’t accumulate new contribution limits for any year you maintain non-resident status in Canada. Understanding these rules can help you avoid unexpected penalties and make the most of your savings.
TFSA Investment Options
There are many different TFSA options you can choose from. They vary in terms of length, interest rate, and flexibility. If you know you’ll need access to your TFSA money soon, a redeemable option may be best. If you can lock in your funds for a longer period, you’ll benefit from a higher interest rate.
Some TFSA options have a $1,000 minimum deposit requirement. To help you easily save for the TFSA of your choice while reaping the benefits of tax-free earnings, give a TFSA Savings Account a try.
Here’s how it works:
You make automatic or manual deposits to your TFSA Savings Account at any frequency and amount.
You earn tax-free compounding interest to reach your $1,000 goal faster.
Once you reach your $1,000 goal, you can transfer your funds to a TFSA investment.
Afraid to lock in your money in case interest rates increase? Another TFSA option is our 3-year convertible TFSA. It allows you to convert to a higher interest rate once during your investment term, so you don't miss out on better rates.
TFSA Contribution Rules
As of 2024, the annual contribution limit on a TFSA is $7,000. It’s a standard limit applicable to any account holder. However, it’s critical to understand how your TFSA contribution space works.
The year you turned 18 (if you’re a Canadian resident) or acquired Canadian residency (if you become a resident upon reaching 18) marks the starting point from which your TFSA contribution room is being estimated. From that point onwards, you start accumulating your lifetime limit.
Here’s an example. Let’s say you are a Canadian resident who reached the age of 18 in 2009. That makes your lifetime contribution room $95,000. Why?
The contribution limit hasn’t always been $7,000. In fact, it’s just reached this number. From 2019 to 2022, the limit was $6,000 a year. Then, $6,500 in 2023. And now it’s $7,000 in 2024 and 2025.
Understanding the current TFSA contribution rules is also critical to avoid over-contribution penalties. Remember that when you over-contribute, you will be charged a penalty of 1% per month on the over-contribution amount in your TFSA.
TFSA Withdrawals
You can withdraw your funds from a TFSA when you need to, keeping in mind your funds may be locked in if you’ve selected a non-redeemable option.
Whatever your reasons for withdrawing money — an unexpected expense or a long-planned purchase — you will not have to pay taxes on your withdrawal.
For retirees, TFSA benefits are even more appealing. You can withdraw your savings without affecting certain retirement benefits, which makes a TFSA an excellent option for storing funds.
TFSA vs RRSP: Key Differences Explained
What are the differences between a tax-free savings account and a registered retirement savings plan (RRSP)? The TFSA vs RRSP comparison exists for a reason since they have both similarities and unique differences.
Let’s say you’ve received a significant inheritance and are deciding between a TFSA and an RRSP. Both are excellent options, but their benefits depend on your circumstances. Your choice should align with your financial goals
An RRSP is designed for long-term retirement savings. Contributions offer an immediate tax deduction, which is particularly beneficial if you’re in a higher tax bracket. However, withdrawals are taxed as income, and exceeding contribution limits can incur penalties.
A TFSA allows your investments to grow tax-free and offers flexibility with no tax on withdrawals, making it ideal if you need access to your funds before retirement. However, it doesn’t provide an immediate tax deduction for contributions.
A TFSA might also be the choice for you if your annual income is below $50,000. You’re more likely in this scenario to receive tax credits or tax reductions, so an RRSP tax deduction would be less impactful for individuals in lower tax brackets. Additionally, withdrawals from an RRSP in the future are taxed as income.
How Do I Open a TFSA?
Any Canadian citizen with a valid Social Insurance Number who is 18 or older qualifies to open a TFSA.
Get started today! If you already have a registered investment with us, such as an RRSP, you can open a TFSA in minutes! Just follow these easy steps:
Log into online banking or your mobile app.
Navigate to Accounts > Open Account > Registered Investments
Select the type of tax-free savings account you'd like to open and follow the simple prompts.
The Bottom Line
If you’re looking for an investment account to maximize your savings while benefiting from tax-free growth on your investments, a TFSA is an excellent choice for building wealth over time.
A TFSA offers an excellent opportunity to grow your money tax-free. It’s a relevant savings strategy both for short and long-term goals to help secure your financial future tax-free.
Watch Your Savings Grow Faster
The tax-free savings account lives up to its name. Start saving on taxes and grow compounding, tax-free interest today!