We don’t know who decided to call it a savings account, but whoever it was should probably relinquish the part of their job that involves naming stuff! A TFSA is way more useful to you as an investment account. Investing gets you far higher returns in the long run, and you’ll get the benefit of not paying a single dollar of tax on all that money you made.
Below, we’ll give you a whirlwind primer on all things TFSA. But maybe all this talk of TFSAs just gets you excited to learn about even more aspects of TFSAs. Should that be the case, don’t worry. We have more in-depth articles on the following topics:
A TFSA is not really much at all like those savings accounts you probably had as a kid. You know, the ones that earned almost no interest but provided access to all-you-can-eat stale lollipops from your local bank branch. Instead, think of a TFSA as a basket. You can pick what to put in that basket from a bevy of financial instruments — exchange traded funds, guaranteed investment certificates, stocks, bonds, and, yes, actual cash savings.
The Canadian government introduced TFSAs in 2009 as a way to encourage people to save money. Since you’ve already paid tax on the portion of your income you put into your TFSA, you won’t have to pay anything when you take money out.
How a TFSA works
You open a TFSA, deposit money, and hopefully watch your money grow. One of the greatest features of the TFSA is its flexibility in terms of when you can withdraw your money. Unlike an RRSP, you’re free to withdraw at any time without penalty, but there are government-mandated limits to how much you can contribute every year. The maximum you’re allowed to put into a TFSA each year is known as the contribution limit and it varies from year to year. It’s a good idea to take a gander at this year’s limit and past limits before you open a TFSA and start contributing. That’s because over-contributing comes with a nasty little penalty — 1% of the excess contribution every month until it’s withdrawn.
If and when you do withdraw money from a TFSA, the amount you take out is added to your contribution limit at the start of the next calendar year. For example, if you’ve already reached your contribution limit and you withdraw $5,000 from your TFSA this year, you would need to wait till Jan. 1 of next year to add the $5,000 back. And TFSA contribution room doesn’t disappear if you fail to contribute in any given year. It just rolls over into the next year so you’ll have an ever-expanding contribution limit.
Advantages of a TFSA
A TFSA is what’s often referred to as a “tax-advantaged account,” meaning the government uses it to provide tax breaks. TFSAs are considered tax-exempt to incentivise people to save for retirement or some other large purchase like a home. While contributions to a TFSA earn you no immediate tax breaks the way RRSP contributions would, you will receive big breaks in the future, since all investment gains will not be subject to any taxes. In other words, since you already paid tax on the money you put into your TFSA, you won’t have to pay anything when you take money out.
Limitations of a TFSA
TFSAs are pretty great, but they can also get you into a bit of trouble if you’re not careful. Because TFSAs are so popular and plentiful and you can open as many as you want, it’s easy to lose track of how much you’re contributing. As we outlined above, even if it’s by accident, should you over-contribute (i.e., put in more money in a calendar year than you’re allowed by law), you will be charged a penalty of 1% per month on the excess amount you put in your TFSA.
One more thing: remember that you can’t day-trade stocks in your TFSA, unless you’d like to experience the wrath of the Canadian government’s tax department.
TFSA contribution limits
When setting TFSA limits, the government doesn’t plan too far ahead.
This year’s TFSA contribution limit is $7,000, no matter who you are (assuming you’re a Canadian citizen over 18) or how much you make. You start building TFSA contribution space in 2009, the year you turned 18, or the year you became a Canadian citizen — whichever is the most recent. Since the earliest you could have started accumulating contribution space is 2009, that puts the lifetime limit for 2024 at $95,000.
If you’ve deposited some money over the years, just subtract that number from your total lifetime limit to arrive at your maximum contribution. As we mentioned before, remember if you’ve made any withdrawals from your TFSA, you can recontribute them the year after you made the withdrawal.
TFSA investment options
You might choose to invest in stocks, bonds, real estate, or smelly-but-adorable alpacas. A number of factors will dictate how you invest, including your risk tolerance and investment horizon — aka, when you need to access the money. To help you figure things out, we have our TFSA Investment Options and Strategy article that will offer some specific tips on TFSAs.
TFSAs vs. RRSPs
Both TFSAs and RRSPs are phenomenal in their own ways and somewhat similar in how they operate. TFSA vs. RRSP is kind of a Batman vs. Superman question, one you might weigh carefully after reading about the relative merits and drawbacks of the two.
Here are are a few of the biggest factors to consider when it comes to choosing between a TFSA and an RRSP:
If you haven’t contributed much toward your retirement and you happen to have access to a pile of money right now through, say, a bonus or an inheritance, a TFSA might be the best option for you, since RRSPs have what’s called an annual deduction limit.
TFSAs are designed to be easily accessed before retirement — which is good, especially for those with a more immediate goal in mind like buying a house or car. Because their funds are so darned easy to access, TFSAs are less good if you happen to be the type who’s never been able to resist smashing a piggy bank.
If the funds you’re investing are for your retirement, TFSAs are generally considered preferable to RRSPs for those earning less than $50,000 a year, for tax reasons more fully spelled out in this article on TFSAs vs. RRSPs.
TFSA taxes
While withdrawal and contribution rules are usually the most discussed aspects of TFSAs, you’ll probably want to avoid any nasty surprises come tax season, right? Because although it’s technically a “tax-free” account (it’s in the name!), there are still some instances where you’ll be taxed on the account.
Generally, interest, dividends, or capital gains earned on investments in a TFSA are not taxable, both when they’re in the account or when they’re withdrawn. But if you invest in United States securities, any dividends issued from those U.S.-listed stocks or ETFs may be subject to a non-resident withholding tax of generally 15% (levied by the IRS).
Another time you’ll have to pay taxes on your TFSA is when you qualify as a non-resident of Canada. If you make any contributions to a TFSA during a year where you’re a non-resident of Canada, you’ll be charged a 1% monthly tax on those contributions. As a reminder, you’re considered a non-resident if you live outside of Canada for the majority of the tax year. You can find more information on TFSA taxes for non-residents here.
How to open a TFSA
Any Canadian who is 18 years of age or older with a valid social insurance number (SIN) can open a TFSA. All you need to do is reach out to a financial institution, credit union, or insurance company that offers TFSAs and provide your SIN and date of birth. Unless you’re trying to impersonate someone else, the process shouldn’t take any more than 10 minutes to complete.
Moving a TFSA from another bank or financial institution
The good news for those searching to switch banks is that it’s blessedly simple: there may be a fee to transfer your TFSA but it might get reimbursed by your new financial institution. It’s best to check in with both to make sure you know the charges.
There are generally no tax consequences of moving a TFSA. But do keep in mind that when you authorize the transfer, you’ll usually be asked whether you’d like to transfer your account “as cash” or “as is,” which means moving your existing holdings. Depending on the investments you hold, there can be fees associated with choosing one over the other.
Death of a TFSA holder
Wow, things turned dark kind of quickly there, didn’t they? Although no one likes thinking about these things, it’s important to know what happens if an account holder passes away.
For a TFSA you can name a successor holder or designated beneficiary. A successor holder must be either a spouse or common-law partner, and they would receive the entire TFSA from the deceased person — and the entire account would continue to grow tax-free. It’s important to note this transfer does not increase or decrease the successor holder’s contribution room in any way.
Everybody else who inherits a TFSA is a designated beneficiary, and they would receive the cash from the TFSA. The cash can be placed in the beneficiaries’ TFSA if they have enough contribution room, otherwise it would go into a taxable account, and they would be responsible for paying tax on any growth following the death of the original account holder.
