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Tax Free Savings Account (TFSA)

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.

A Tax Free Savings Account (TFSA) is not only one of the great wonders of the world, it’s also one of the great misnomers of the English language. Why is that? Well, it’s not a savings account at all.

We don’t know who decided to call it a savings account, but whoever it was should probably relinquish the part of his or her job that involves naming stuff! We’re about to give you a whirlwind primer on all things TFSA. Should you hope to go a little deeper on the big topics we cover, don’t hesitate to check out more in-depth articles on the following topics:

What is a TFSA?

Though TFSA is an acronym for Tax Free Savings Account, it’s not really much at all like those savings accounts you probably had as a kid--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 tax-free savings account (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 savings accounts. The Canadian government introduced TFSAs in 2009 as a way to encourage people to save money. Since you paid tax on the money you put into your TFSA, you won’t have to pay anything when you take money out.

How Does A TFSA Work?

How a TFSA works is very simple. You open a TFSA, deposit money and hopefully watch your money grow. One of the greatest features of the TFSA is their 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 how much you can contribute the following year. For example, withdrawing ​5,500—plus $5,000. 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 provides tax breaks for those who them as an incentive for saving for retirement or some other large purchase like a home. TFSAs are considered tax-exempt. While contributions to a TFSA earn you no immediate tax breaks like RRSP contributions would, you will however 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

TFSA's 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 accidentally 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 amount in your TFSA that is in excess of the limit. Oh, and 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.

The lifetime limit for 2019 is ​$63,500. If you’ve deposited some money over the years, just subtract that number from your total lifetime limit to arrive at your maximum contribution. If you've made any withdrawals from your TFSA you can recontribute them the year after you made the withdrawal. As soon as the CRA sets a new limit, they’ll update their contribution limits page.

TFSA investment options

As we’ve explained, TFSAs are just baskets in which you might put any kind of investment, so 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. Two articles will be of particular interest to you. 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.

TFSA rules (withdrawals and over contributions)

Pretty much any rule query you could imagine will be answered on the TFSA Rules You Need To Know page, but here are two basic things to remember:

  • Don’t over-contribute; if you do you’ll be assessed a 1% penalty on the excess contribution every month until it’s withdrawn.

  • Understand TFSA contribution rules; if you hope to replace money you withdraw from your TFSA, you’ll have to wait until the year following your withdrawal to earn that contribution room back.


Since both TFSAs and RRSPs are phenomenal in their own ways and somewhat similar in how they operate TFSA vs. RRSP is a 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 points out—if you're already benefiting from the tax advantages that come with an RRSP then you should also take advantage of a TFSA.

"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 towards your retirement and you happen to have access to a pile of money right now through, say, a bonus, or inheritance, a TFSA might be the best option for you, since RRSPs have what's called an annual deduction limit, meaning that you won't be able to deduct over a certain amount in any given year. The number for 2020 is $27,230 but you can 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.

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 is reach out to a financial institution, credit union or insurance company who offers TFSAs and provide your SIN and date of birth. It’s likely they’ll ask you for supporting documents like a birth certificate to prove you are you who you say you are. Unless you're trying to impersonate someone else, the process shouldn’t take any more than ten 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. Ready to take five minutes to open the finest TFSA imaginable? Sign up to Wealthsimple, the only automated investing services to offer all of its client’s unlimited human support. Every Wealthsimple client gets state of the art technology, low fees and the kind of personalized, friendly service you might have not thought imaginable from a low-priced investment service.

Last Updated August 2, 2019

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