What is a TFSA?
A Tax-Free Savings Account (TFSA) is a registered plan provided by the government and an excellent financial tool to help Canadians save and invest for their future.
A TFSA is like a basket in which you hold different investments. Your contribution into a TFSA is from after tax dollars with which you can buy investments of your choice. The key feature of a TFSA is that any appreciation or growth on investments and earnings (interest or dividends or capital gains) are tax-free. That means you won’t have to pay tax on your earnings, unlike in a traditional savings account.
Eligibility and Contribution Limits for a TFSA
Who Can Open a TFSA?
- Canadian residents aged 18 or older
- For those who moved to Canada after 2009, eligibility is the later of:
- The year you became a Canadian resident, or
- The year you turn 18
Annual Contribution Limits
- TFSAs were introduced in 2009 with an initial $5,000 annual limit
- For 2024 and 2025, the annual limit is set at $7,000
- Check the CRA website for the most up-to-date annual limits
Lifetime Contribution Limit
- As of 2025, the maximum lifetime contribution will reach $102,000
- If you’ve been eligible since 2009 and haven’t contributed, you could have up to $102,000 in contribution room by 2025
Note – Overcontributions may result in penalties so verify your available contribution room with the CRA before making deposits.
Let’s see how can you use a TFSA to your benefit.
- Prioritize TFSA savings over non-registered savings to maximize tax-efficiency – Many people have money in non-registered accounts where they pay tax on any investment earnings in these accounts. If you haven’t fully utilized your TFSA contribution room, you could be incurring unnecessary tax liabilities. You should transfer the eligible non-registered assets in to your TFSA to maximize tax-free growth and withdrawals.
- Suitable for short-term savings goals – If you’re saving for a big purchase in the near future — like a vacation, a new car, or home renovations — a TFSA is ideal for it because any growth and returns (dividends / interest) on your investments is tax-free. This means you can reach your goals faster because you’re not losing part of your returns to taxes.
Plus, because you can withdraw funds at any time without penalty, your money is accessible when you need it.
- Great complement to your retirement savings accounts – In an RRSP, you can contribute up to 18% of your earned income until the age of 71. If you have an employer pension plan, the 18% limit is reduced by your pension adjustment. TFSAs do not have an age maximum unlike RRSPs, so you can continue to hold and invest in a TFSA after age 70, giving your investments a longer horizon to grow. If you decide to save for retirement in your TFSA, along with RRSP, this strategy could super charge your retirement savings!
- Tax-free withdrawals without impacting your benefits from other sources – In retirement, withdrawals from RRSP are taxed as income, while TFSA withdrawals are completely tax-free always. With proper planning you can use your RRSP and TFSA to your best advantage to ensure you minimize your taxes in retirement and preserve access to government benefits, like OAS.
- Carry forward of contribution room
If you don’t contribute one year, you get to carry forward the contribution room to future years. Also, any withdrawals you make can be deposited back, but you have to wait until the next calendar year. So, if you take money out, you can re-contribute it in future years, allowing your savings to continue growing without any penalties.
- Estate Planning: Leaving a legacy, tax-free
A TFSA is also an excellent tool for estate planning. On your death, your TFSA gets rolled-over to your spouse tax-free and this effectively increases their TFSA room. If you don’t have a spouse, you can designate another beneficiary and they will receive the funds tax free on your death, but this is not a TFSA rollover. Because the funds in the account are not taxable upon your death, it can be a tax-efficient way to pass on assets to your heirs. With proper planning, a TFSA can help you leave a larger financial legacy without burdening your beneficiaries with taxes.
How to Make the Most of Your TFSA:
- Maximize contributions: Aim to contribute the maximum annual limit to take full advantage of tax-free growth. Unused contribution room carries forward, so even if you don’t contribute in one year, you can catch up in future years.
- Invest for growth: You can hold a wide range of investments, including stocks, bonds, mutual funds, and ETFs, to help grow your savings.
- Use as an emergency fund: Consider using a portion of your TFSA for unexpected expenses, as it offers easy access to your funds without tax consequences.
Conclusion
A TFSA is a powerful savings tool that offers tax-free growth and flexible withdrawals, making it an essential component of many Canadians’ financial strategies. Whether saving for short-term goals or long-term financial security, a TFSA can help individuals maximize their savings potential. Start taking full advantage of your TFSA today and watch your money grow, tax-free! Follow along for more of our blog posts on A-B-Cs of Financial Literacy in Canada.
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