What is a Tax-Free Savings Account?

Wondering 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 you earn even from a regular savings account. If you feel like you're never getting ahead with your savings goals, let us introduce you to the Tax-Free Savings Account (TFSA).

Simply put, a TFSA is a registered investment that allows for tax-free gains. That means you don’t have to pay taxes on the interest you earn like with a typical savings account. You can use it as savings towards any financial goal – a vacation, a reno, a vehicle – as you can withdraw funds at any time for any reason without penalty. Think of it as a tool that you use to deposit money and watch it work for you.

Benefits of having a Tax-Free Savings Account

The TFSA basically gives you an edge when it comes to tax. It’s one of the most straightforward ways of getting tax-free gains. 

The Tax-Free Savings Account is considered a sure-fire way of saving up for an early retirement or for a big “life-goal” purchase like a house or a boat or that dream car that you’ve been eyeing. 

The key aspect to note here is that you’ve already paid tax on the money that you’ve deposited into your Tax-Free Savings Account (TFSA), therefore, you will not have to pay anything when you eventually withdraw your money. 

There’s one small catch: The amount of money that you can put into a Tax-Free Savings Account each year has limits. Because of this, you’ll need to keep track of your contributions and withdrawals. The total contribution cannot be more than what’s allowed in your contribution room for that year. Even if you withdraw money from your TFSA, this doesn’t impact your contribution limit.

For example, let’s say the TFSA contribution limit for the year was $6,000.

You deposit $6,000 to your TFSA 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. That’s not the case. You made a $6,000 contribution in April. That’s all you can contribute for the year. You can see why keeping track of contributions versus your TFSA balance is so important.

The TFSA Contribution limit for 2022 is $6,000. If you over-contribute, you will be charged a penalty of 1% per month on the amount in that TFSA.

How does a TFSA work?

The workings of a Tax-Free Savings account can be summarized as flexible and very straightforward. Let’s break it down.

1) TFSAs are available to any Canadian resident who’s 18 and older with a Social Insurance Number. 

2) You can contribute up to $6,000 per year and the interest gained isn’t taxable.

3) TFSA contributions are not tax deductible (like they are with an RRSP). 

4) You do not have to pay tax on any withdrawals and you can withdraw at any time.

5) If you don’t contribute $6,000 in a year, you can carry it forward to the next year.

6) You can make multiple withdrawals over a year. Any amount you take out will be added to your contribution room for the following year so your contribution limit will always keep on growing.

7) You earn interest on your interest! This is called compounding interest and it really helps your money grow.

TFSA Investment Options

There are no minimum balance requirements for a TFSA itself, but if you want certain products like a GIC for your TFSA, you might need $1,000 to get started. Sound steep? An Easy Start investment can help.

1)     You make automatic or manual deposits at any frequency and amount.

2)     You earn interest at a higher rate than a typical savings account to reach your $1,000 goal faster! You just need a minimum deposit of $5 to get started.

3)     Once you reach your $1,000 goal, you can transfer your funds to a TFSA.

Like we mentioned earlier, you can withdraw money from your TFSA anytime. However, if you lock in your funds for say one to five years, you can enjoy higher interest rates. It’s a fantastic option as a long-term savings plan. But what if interest rates increase and your money is locked in for another few years? You can take advantage of convertible features on your TFSA. For example, we offer a 3-year convertible TFSA which means you can convert to a higher interest rate once during your investment, so you don’t miss out on better rates.

How do I open a Tax-Free Savings Account?

Any Canadian citizen with a Social Insurance Number who is 18 years of age or older is eligible to open a Tax-Free Savings Account (TFSA). Inquire online today OR if you already have a registered investment with us, for example, an RRSP, you can open a Tax-Free Savings Account in minutes! Just follow these easy steps:

  1. Log in to online banking or your mobile app
  2. Choose Accounts > Open Account > Registered
  3. Choose the type of TFSA you'd like to open and follow the prompts

You can then contribute or withdraw from your TFSA Savings Account via online banking or our mobile app by simply transferring across accounts!

Watch your savings grow faster

They don’t call it the Tax-Free Savings Account for nothing. Start saving on taxes and grow flexible savings faster today!