Investments

TFSA — Tax-Free Savings Account

The most flexible account Canada offers. You contribute money you have already paid tax on, and after that nothing is taxed again — not the growth, not the withdrawals, whatever you take the money out for. That combination makes it the right home for savings you might genuinely need back.

How It Works

What makes a TFSA different

No tax on the way out

Contributions are not deductible, so there is no refund when you pay in. In exchange, everything the account earns is yours: interest, dividends and capital gains are never taxed, and neither is any withdrawal.

Because withdrawals are not income, they also do not affect income-tested benefits — which matters a great deal in retirement, where an RRSP withdrawal can claw back Old Age Security and a TFSA withdrawal cannot.

The room comes back

Withdraw money and that amount is added back to your contribution room at the start of the following calendar year. That is the detail people get wrong: putting it back in the same year can create an over-contribution and a penalty, even though you are only replacing your own money.

Who can open one

Any Canadian resident aged 18 or over with a valid social insurance number. Room starts accumulating from the year you turn 18 whether or not you open an account, and there is no age at which a TFSA must be closed — unlike an RRSP.

Using It Well

What a TFSA is actually for

Money with no fixed date

An emergency fund, a car in a few years, a wedding, a sabbatical. Anything where you cannot say precisely when you will need it belongs here rather than in a locked-in retirement account.

A first step before an RRSP

Early in a career, when income and marginal tax rate are lower, an RRSP deduction is not worth much. Saving in a TFSA and moving to RRSP contributions later, when the deduction is worth more, often produces a better result. RRSP room carries forward, so nothing is lost by the wait.

After the RRSP is full

At the other end, people who have used all their RRSP room use a TFSA for further tax-sheltered growth. It is the only other account with no tax on the growth and no restriction on what the money is eventually for.

Retirement income that does not count as income

Drawing on a TFSA in retirement does not raise your taxable income, so it does not trigger OAS clawback or reduce income-tested benefits. Holding some retirement savings in a TFSA gives you a tap you can turn on without tax consequences.

Re-contributing in the same year is the classic mistake. Take $10,000 out in June and put it back in November, and unless you had unused room you have over-contributed — with a penalty tax for every month the excess sits there. The withdrawn room returns on 1 January, not immediately.

No obligation

TFSA, RRSP, or both?

The right split depends on your income now, your income later, and when you might need the money. An advisor will work through it with you in one conversation, and will tell you if the plain answer is to fill the TFSA and stop there.

Talk to an advisor

TFSA questions

Room accumulates every year from the year you turned 18, and unused room carries forward indefinitely. Your exact figure is in CRA My Account. Bank statements often lag, so check the CRA rather than the account.

Only if you choose to hold cash in it. A TFSA is a wrapper that can hold GICs, mutual funds, ETFs, stocks and bonds. Many people hold cash in one and wonder why it grows slowly — the account is not the problem, the contents are.

Yes, and they are not reported as income. That is what makes a TFSA useful in retirement, where taxable income affects OAS and other income-tested benefits.

The CRA charges a penalty tax of one percent per month on the excess for as long as it remains. Withdraw the excess as soon as you notice — the charge stops accruing once it is out.

You can, but US dividends are generally subject to withholding tax that a TFSA cannot recover, unlike an RRSP. It does not make it wrong, it just makes an RRSP the better home for US dividend payers.

Saving for something with no fixed date?

Call 437-428-2828 and talk it through with a licensed advisor. Mon–Sat, 9am–8pm ET. No obligation, and nobody will push you to buy on the call.

Call 437-428-2828