Everything You Need to Know About Tax Free Savings Accounts (TFSAs)

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Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.

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.

Our TFSAs use Nobel Prize winning investing strategy at a fraction of the fees charged by big banks. Plus it takes just a few minutes to get started. Let’s go!

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.

Our TFSAs use Nobel Prize winning investing strategy at a fraction of the fees charged by big banks. Plus it takes just a few minutes to get started. Let’s go!

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 $6,000, no matter who you are (assuming you’re a Canadian citizen over 18) or how much you make. You start building TFSA contributions in 2009, the year you turned 18, or the year you became a Canadian citizen — whichever is latest. Since the earliest you could have started accumulating contribution space is 2009, the lifetime limit for 2022 is $81,500. As soon as the CRA sets a new limit for the year, they’ll update their contribution limits page.

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 two articles for you to check out. Our TFSA Investment Options and Strategy will offer some specific tips on TFSAs, while How to Buy Stocks, Beginners Guide will provide invaluable step-by-step advice on stock market investments, which will likely be a big part of where your TFSA dollars go.

Open a Wealthsimple TFSA and in just five minutes we’ll create a personalized investment portfolio to meet your financial goals. Did we mention the low fees and friendly financial advice? Let’s go!

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.

Michael Craig, Portfolio Manager at Wealthsimple, shares this nugget of wisdom:

"If you’re already contributing to an RRSP each year and receiving a healthy tax refund, you may want to consider contributing to a TFSA too."

In addition, 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. You can contribute a fixed amount to your RRSP; find past, current, and future deduction limits on this CRA page.

  • 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 — or, you know, Wealthsimple — 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. You obviously have many choices of institutions where you might open a TFSA, but consider trying to find one that requires no minimum investment, charges low fees, and provides unlimited phone support from knowledgeable humans for every client. (A hint: it’s us!)

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 — they don’t call it a tax-free savings account for nothing! 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. We’ve got a handy little guide explaining the differences between the two right over here.

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.

Frequently Asked Questions

In order to open and start contributing to a TFSA, you need to have a valid SIN and be at least 18 years old and a resident of Canada. As the account holder, you’ll be the only one who can make contributions, withdrawals, and determine how the funds will be invested.

Yes. Contribution limits refer to the maximum amount you can contribute to your TFSA each year, and contribution room automatically accumulates every year. You can also withdraw from your TFSA anytime you like, but remember that whatever amount you withdraw will not be added back to your annual contribution room until the next calendar year. Unused contribution room also carries over into the next year. Unlike RRSPs, you can’t deduct the amount you contributed from your income in your taxes.

The sum of this year’s contribution limit and any past contribution room you have not used. For 2022, the annual TFSA contribution room is $6,000. But your own individual contribution room is determined by that number, any unused TFSA contribution room from the previous year, and any withdrawals made from the TFSA in the previous year.

You can’t. TFSA contributions are not tax deductible like RRSP contributions and you can’t claim them on income tax returns. That’s because the TFSA contributions, interest and returns gained, and withdrawals are already exempt from taxation. The benefit of a TFSA is not that you can deduct contributions in your tax return but rather that the earnings in your TFSA can grow tax-free.

Sure! There’s nothing stopping you, but we wouldn’t necessarily recommend it. The money will grow tax-free and withdrawals are free. The only thing you need to keep in mind is the contribution limit. If you withdraw from the account, you won’t be able to add the withdrawn funds back into your TFSA again until next year.

As long as you’re able to stay within the contribution limits, there’s no reason why a TFSA can’t hold your emergency fund. However, TFSAs are usually used in conjunction with RRSPs to create a retirement fund or to save for another big purchase down the line.

Words to the wise: it’s probably best to keep emergency funds in cash savings rather than in investments, since you want to be able to access your money whenever you need it and not face the possibility of withdrawing during a market dip. You could consider putting your emergency fund in a savings account and use your TFSA for longer-term savings goals.

You absolutely can! The same logic as above regarding the emergency fund applies here as well; however., when you withdraw the money, you won’t be able to contribute it again until the following year. If you want to take a vacation in the near future, cash savings might be a better option to avoid market swings. If you’re saving for the vacation of a lifetime in 10 years time, then you could consider investing the money instead, depending on your circumstances.

TFSAs can hold U.S. stocks, but you’ll need to keep an eye out for taxes. American taxes dividends on U.S. stocks held in TFSAs. There’s a 30% withholding tax on any U.S. stock dividend, only half of which can be claimed as a deduction on your tax returns. So effectively, you’ll be paying a 15% tax on dividends.

As long as you have an emergency fund in place elsewhere, go for it. If you can afford to do so, filling up all of your available contribution space can really help you take advantage of a TFSA’s tax benefits. Just make sure you’re keeping a very close eye on your contribution room and making sure you don’t over-contribute in the same calendar year if you withdraw and then plan to re-deposit funds.

Yes. The assets in your TFSA are like any other investment, and they can lose value over time. You can actually lose contribution room too. If you withdraw all your money from a TFSA and the account value is less than your total contribution room was, the next year, you don't regain all your contribution room, just an amount equivalent to the value of the withdrawal.

You can open as many TFSA accounts as you like, but your contribution space remains the same. That means that if you have $6,000 of contribution room for the year, you can make only $6,000 worth of contributions across your collection of TFSAs, whether you have one or five. Multiple TFSAs can be useful to some people, but they can also make it harder to keep track of contributions.

No, TFSAs can’t be joint. You are the sole holder of your TFSA account. That’s because everyone has their own individual contribution limit, and this cannot be combined with anyone else. You are, however, able to designate successor holders and beneficiaries to your TFSA.

Yes, the assets within a TFSA can be used as collateral against a loan. A TFSA can, for example, be used to secure a mortgage, although this may come with the stipulation that you can’t withdraw funds from the TFSA until the loan has been paid off.

Wow, good for you! Sounds like you’ve been a busy saver. If you stocked up your emergency fund as well, it’s time to start diversifying your investments further, if you haven’t done so already. A personal investing account, for example, can help you explore other investment opportunities once your retirement savings are in a good place.

Building up a solid emergency fund with the help of a high-interest savings or chequing account is also a key component of financial health. And if you have children, a Registered Education Savings Plan is a great way to start building up a strong financial foundation for them.

Last Updated May 9, 2022

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