Guide To TFSAs

By Kenny Zhu · September 11, 2023 · 10 minute read

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Guide To TFSAs

If you’re a Canadian age 18 or older, you may want to open a Tax-Free Savings Account (TFSA). Funds deposited in this kind of tax-advantaged account are not assessed any taxes on any interest earnings, capital gains, or dividends earned on contributions.

TFSAs can be opened at almost any major financial institution across Canada for those age 18 or older with a valid Social Insurance number, or SIN. They can be held in cash, mutual funds, government bonds, guaranteed investment accounts, and sometimes even publicly traded stocks.

In this guide, you’ll learn more about TFSAs, including:

•   What is a Tax-Free Savings Account?

•   How does a TFSA work?

•   How do you withdraw funds from a TFSA?

•   What are the pros and cons of TFSAs?

•   What are U.S. alternatives to TFSAs?

What Is a Tax-Free Savings Account?

TFSAs, or Tax-Free Savings Accounts, can be excellent tax-sheltered accounts that allow contributed funds to grow-tax free. That means no taxes on interest earnings, dividends, or capital gains. What’s more, funds can be withdrawn at any time without penalty for account holders. This is a key difference between TFSAs and retirement savings plans, which are designed to be held till a certain age.

If you compare a TFSA vs. RRSP (Registered Retirement Savings Plan), you’ll see that a TFSA allows you to withdraw your contributions and any subsequent earnings over time, tax-free. With an RRSP, a certain percentage of any withdrawals taken out prior to retirement may be withheld.

To look at this from a different angle, any funds contributed into a TFSA can be withdrawn on demand and are not subject to taxation or penalty, as long as all contributions remain beneath your overall TFSA contribution limit. This can make them a smart tax shelter for both short-term and long-term financing needs.

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How Do TFSA Contributions Work?

Here’s the scoop on how TFSAs work:

•   Tax-Free Savings Accounts allow you to contribute a finite amount, set annually by the Canada Revenue Authority (CRA). As mentioned above, your funds within the TFSA can earn interest, earn dividends and even capital gains without being taxed. The 2023 contribution limit for TFSAs is $6,500. This makes them excellent financial vehicles when it comes to the important goal of saving for the future.

•   TFSA limits accumulate and carry over every year. This means that your contribution limits (commonly referred to as your “contribution room”) will stack up annually. This holds true whether or not you’ve completed a Canadian income tax return or even have an existing account at the time. In other words, if this year’s contribution limit is $6,000 and you only contribute $4,000, next year you can save an extra $2,000 over the limit to catch up. So if the limit for the following year was $6,000, your contribution room will be $8,000 (adding the $6,000 and the additional $2,000).

•   In fact, you’re allowed to make retroactive contributions for all of the cumulative annual contribution limits dating back to 2009, or when you first turned 18, whichever was more recent.

•   Make sure you keep track of your overall contributions, as accidentally overcontributing to the account can result in tax penalties. According to the CRA, overcontributions are subject to a 1% penalty tax on the overcontribution amount each month until it’s withdrawn from the account.

Contributing to a TFSA

To contribute to a TFSA, you’ll want to first figure out what your current annual contribution limit is and then calculate how much additional contribution room you have from years past where you didn’t hit the limit. By the way, there’s no earned income requirement for contributing to a TFSA.

To help you calculate your total TFSA contribution limit, check this table below that outlines all of the annual contribution limits since the program was established in 2009. You’ll also find a cumulative contribution limit to help you back-date your permitted total contribution amount.


Annual Limit

Total Accumulated Limit

2009 $5,000 $5,000
2010 $5,000 $10,000
2011 $5,000 $15,000
2012 $5,000 $20,000
2013 $5,500 $25,500
2014 $5,500 $31,000
2015 $10,000 $41,000
2016 $5,500 $46,500
2017 $5,500 $52,000
2018 $5,500 $57,500
2019 $6,000 $63,500
2020 $6,000 $69,500
2021 $6,000 $75,500
2022 $6,000 $81,500
2023 $6,500 $88,000

If you turned 18 in 2009 or prior and have just begun making contributions this year, your total permitted lifetime contribution limit is $88,000. If you turned 18 after 2009, your contribution room (or limit) will be the sum of the cumulative amounts for all years starting from when you first turned 18.

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How to Withdraw Money From a TFSA

When thinking about different types of savings accounts, you may wonder how a TFSA stacks up in terms of how you can withdraw funds. One important point: You can withdraw both contributions and earnings from your TFSA at any time, without fear of tax penalty.

Withdrawals from a TFSA are only logged when you transfer or take savings out of your account. So if you convert your investments into cash and the money remains in your account, this won’t be counted as a withdrawal.

You can withdraw any amount up to the entire balance of your TFSA account (though obviously, you’d like to avoid overdrafting a savings account). One of the best aspects of TFSA withdrawals is that the amount of any withdrawn contributions is automatically added back to your total TFSA contribution room for the following tax year.

However, if you reach your contribution limit in a given year, you won’t be able to make any additional contributions during that year, even if you decide to withdraw funds from the account. Contribution rooms are only recalculated after the beginning of the following year.

Withdrawals can typically be done easily online; check with your account holder for details.

Pros and Cons of a TFSA

Curious about the pluses and minuses of TFSAs? You’re in the right place.

Pros of a TFSA

Here are the main advantages of a TFSA:

•   Tax-exempt interest and investment earnings: TFSAs are excellent places to park excess savings to earn a higher rate of return without having to worry about taxes on interest and capital gains. These tax advantages can be a bonus vs. how savings accounts typically work.

•   Withdrawal and use flexibility: Unlike RRSPs which may incur a penalty when withdrawn prior to retirement, TFSAs have no restriction on the use of the underlying funds.

•   Contribution limits rise annually and do not expire: This means that you won’t miss out on any opportunities to add to your TFSA, even if you don’t have any income to add to your account in the current year.

•   Wide range of permitted investments: Unlike what the name suggests, funds deposited in a TFSA can be invested in stocks, bonds, mutual funds and other investments as permitted by the issuing institution.(Remember, though, that these investments may not be insured.)

•   Some insurance coverage: Deposits held in cash or GICs are insured by CDIC (Canada Deposit Insurance Corporation) to a maximum of $100,000, which is separate from other holdings by the same customer at the same member institution.

Cons of a TFSA

Yes, there are some downsides to be aware of with TFSAs. Consider these three points:

•   Non-deductible contributions: All contributions to TFSAs are made on an after-tax basis. As a result, TFSA contributions can’t be used to reduce your taxable income.

•   Day-trading is not permitted: The CRA discourages day-trading in your TFSA account. Depending on the frequency and type of trading activities within your account, it may declare your investment returns to be taxable business income if you’ve failed to follow the rules.

•   Not bankruptcy-remote: Unlike RRSPs which are protected from creditors, TFSAs are subject to the whims of any creditors that may seek to pull your assets back in court. This means that the funds in TFSA are fair game in bankruptcies.

•   Not always insured: If your TFSA funds are held in the market, they will not be insured by CDIC.

Opening a TFSA in 5 Steps

You can open a TFSA at most major financial institutions in Canada. They’re available at banks, credit unions, and even insurance companies. Some offerings may differ slightly in terms of their permitted investments, so it pays to shop around for the one that best suits your financial goals. Here are the five typical steps to opening a TFSA:

1. Shop Around

Research a financial institution that offers TFSAs; make sure it fits your needs and investing style. The following are the types of TFSA accounts available:

a.    Deposit

b.    Annuity

c.    Trust arrangement

d.    Self-directed TFSA.

2. Apply for a TFSA

Once you’ve decided on the right TFSA, contact your chosen institution directly and apply for an account. You may choose to do this in person or online. In some cases, the choice will be yours; in others, the financial institution will dictate how to do so.

3. Gather Documentation

As part of the application process, the institution (issuer) will ask for some personal information. Make sure to have the following items available:

a.    Birthdate

b.    Social Insurance number (SIN)

c.    Government-issued ID

4. Register Your Account

After you’ve provided all the necessary documentation and are approved, your issuer will register the account as a qualifying arrangement with the CRA.

5. Move Funds Into Your Account

You can then set up funds transfers or direct deposits into your TFSA account whenever you’re ready.

Congratulations, you now have a newly formed TFSA!

Keep in mind that while there’s no restrictions on the number of Tax-Free Savings Accounts you can have, your total contribution limit will be shared across all your accounts. Additional TFSAs will not increase your total contribution room.

All contributions will be reported to the CRA by your issuing institution, so remember to keep track of your contributions to avoid running afoul of the tax rules.

Alternatives to TFSAs Available in the US

If you are a U.S. citizen and are looking for an account that is similar to a TFSA, consider these options:

Roth IRA

A Roth IRA is similar to a TFSA in that it is a vehicle designed to help you save for retirement. The contributions grow tax-free; in addition, withdrawals are not taxed. However, contributions are made with after-tax dollars.

Roth 401(k)

If you are employed full-time, your company might offer a Roth 401(k). This is a savings fund that uses after-tax dollars. When you withdraw from the account when you retire, the money is tax-free.

The Takeaway

Anyone who can afford to should consider taking advantage of a Tax-Free Savings Account. TFSAs are versatile tax-advantaged accounts that can be used for both short-term and long-term savings needs. They provide an excellent tax-shelter for your investment earnings that can accumulate over time and be applied to a variety of needs. For those looking for a great savings vehicle, this could be it.

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Can you lose money in a Tax-Free Savings Account?

Yes, depending on the underlying investments, there’s a possibility that you may lose the principal on your investment. When the principal is invested in securities like stocks, bonds and mutual funds, it is not covered by the Canada Deposit Insurance Corporation (CDIC). However, any uninvested cash in your TFSA is insured for up to $100,000 under the CDIC.

How do tax-free savings work?

Interest, capital gains, and dividends earned in a Tax-Free Savings Account aren’t taxed as long as you adhere to guidelines set by the CRA. As long as you remain beneath the contribution limits and don’t run afoul of any TFSA rules, earnings from your TFSA account won’t be treated as income.

Keep in mind, some exceptions, like dividends earned from U.S.-based equities may still be considered taxable income. You’ll want to thoroughly review and understand the investment guidelines set by the CRA when planning your portfolio.

Is a Tax-Free Savings Account worth it?

Depending on your particular situation and goals, it can indeed be worth it. Your interest, dividends, and your capital gains will grow tax-exempt, and you won’t pay taxes on any withdrawals.

What does TFSA stand for?

The letters TFSA stand for tax-free savings account, which is used to refer to a savings vehicle available in Canada.

Are TFSAs available in the US?

TFSAs are not available in the U.S., only in Canada. However, there are other savings vehicles in the U.S. that may provide similar benefits.

Photo credit: iStock/Vladimir Sukhachev

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