The tax-Free Savings Account (TFSA) is one of the most popular registered investment plans in Canada. So if you’re new to Canada, want to start investing in TFSAs or just have some TFSA questions you need answers to, this post is for you.
Consider this post a TFSA 101, containing everything you need to know about Tax-free Savings Accounts, including:
- What are TFSAs?
- How does TFSA work?
- How to start investing in TFSA
If you’re ready, let’s dive in:
What is TFSA?
The Tax-Free Savings Account (TFSA) is a government of Canada program that was set up in 2009. The objective of the program is to provide a way for Canadians to save for different purposes on a tax-advantage basis.
In general, all the investment income, gains or losses in a TFSA are not taxable.
How do TFSAs work?
In simple terms, TFSA is a type of registered investment or savings account that allows Canadians to save and investment up to an annual limit. The contributions are not tax deductible, but investment gains or income and the withdrawals are tax-free.
What are TFSAs used for?
Tax-Free Savings Accounts (TFSAs) can be used for a variety of financial and savings goals.
Unlike a Registered Retirement Savings Plan (RRSP) that focuses on retirement savings for Canadians, TFSAs can be used to save for many other purposes because of the flexibility to contribute and withdraw from it anytime.
Some of the common uses of TFSA include:
- Retirement
- Down payment for a house or car
- College savings
- Emergency fund
Opening a TFSA
Who can open a TFSA?
To be eligible to open a TFSA with a financial institution, an individual will have to be:
- 18 years of age or older
- Have a valid social insurance number (SIN)
- Be a resident of Canada
Where can I open a TFSA?
TFSAs can be opened at many financial institutions including banks, credit unions, online brokerages, robo-advisors and so on.
Should I open a managed or self-directed TFSA?
In general, you can open either a managed or self-directed TFSA with most financial institutions.
With a managed TFSA, all the investment decisions will be handled by the TFSA provider. You simply transfer your money to them, and they handle the rest.
For self-directed accounts, all decisions including how much to invest, when to invest and in what asset types, are handled by the TFSA account holder.
So the choice between the 2 depends on how much involvement you want to have, your investing knowledge and so on.
Read more about some of the best ways to start investing in a TFSA below.
Related Post: Wealthsimple TFSA Review: Everything You Need To Know
Can I have multiple TFSA accounts?
You are allowed to open and run more than 1 TFSA accounts. In fact, about 30% of all TFSAholders have multiple accounts.
For example, you may decide to open a managed TFSA at a robo-advisor like Wealthsimple and also a self-directed TFSA using their commission-free trading app, Wealthsimple Trade.
Just make sure you’re keeping track of your contributions to avoid the stiff penalties.
TFSA Contributions FAQs
Who can contribute to a TFSA?
Any Canadian resident that is 18 years or older and with a valid social insurance number (SIN) can contribute to a TFSA.
Newcomers or new immigrants to Canada can start contributing to a TFSA in the year they migrate. The annual limit is not pro-rated.
That is, the annual limit for someone that migrated to Canada in Nov 2020 will be the same as another person that was a resident all through the year.
What is the annual contribution limit for TFSA?
The 2023 TFSA contribution limit is $6,500 which is a $500 increase since 2019. The annual TFSA limit since the inception of the program are presented below.
| Years | TFSA Annual Limit |
|---|---|
| 2009 to 2012 | $5,000 |
| 2013 to 2014 | $5,500 |
| 2015 | $10,000 |
| 2016 to 2018 | $5,000 |
| 2019 to 2022 | $6,000 |
| 2023 | $6,500 |
The TFSA annual contribution limit are indexed to inflation and then rounded to the nearest $500.
TFSA annual limits are not prorated in the year an individual becomes a Canadian resident, turns 18 or dies.
TFSA annual limits are not prorated in the year an individual becomes a Canadian resident, turns 18 or dies.
How much can I contribute to a TFSA?
The maximum you can contribute to a TFSA depends on your TFSA contribution room. Your TFSA contribution room should not be confused with the TFSA annual limit – they are different.
TFSA contribution room is calculated by adding the following:
- The annual TFSA limit ($6,500 for 2023)
- Unused contribution limit from previous years
- Any TFSA withdrawals from prior years
Can I carry forward unused TFSA contribution room?
Yes. If you don’t contribute up to your annual limit in any given year, the balance can be carried forward to future years.
For example: If you only contributed $4,500 in 2023, the balance of $2,000 will be carried forward and added to your contribution room for 2024.
What is the penalty for over-contributions in TFSA?
There is a penalty for over-contributing to your TFSA. The penalty is 1% per month on the TFSA excess amount.
Unlike the RRSP, there is no grace amount of $2,000.
In addition, there is a 100% tax on any gains or income made on the excess amount contributed.
Smart Tip:
Know your contribution limit and keep it in mind when adding money to your TFSA. Get a free TFSA contribution tracker here.
Are TFSA contributions tax-deductible?
No, contributions made to a TFSA are not tax deductible. This is one of the biggest differences between a TFSA and an RRSP.
With an RRSP, your contributions can be used to reduce your taxable income for the year. TFSA contributions are deemed to be after-tax.
Where can I find my TFSA contribution room?
The fastest way to get your TFSA contribution room is to use the My Account service provided by CRA. Using the service, you can get information about your current contribution rooms for the various registered plans.
Alternatively, you can use the Tax Information Phone Service (TIPS) at 1-800-267-6999 or MyCRA mobile app.
Can I put money in my spouse’s or common-law partner’s TFSA?
Yes, you can give your spouse of common-law partner the money to contribute to their TFSA. The contribution and any withdrawals of the money will not be attributed back to you.
This means, the money will reduce your partner’s contribution room but not yours.
Related Post: Can I Have A Joint TFSA?
Investments in TFSA FAQs
Which investments can I hold in a TFSA?
A wide variety of investments can be held in a TFSA. This include GICs, cash, bonds, stocks, mutual funds.
Like other registered plans in Canada such as RRSP and RESP, the TFSA is not just an account. It’s more like a basket that can allow different investments.
That means, simply opening a TFSA account at a financial institution and earning an interest on it like a regular savings account is a big mistake. Check this post for TFSA Mistakes to avoid.
To really maximize the tax benefits of TFSA, you need to invest in different asset types with potentially higher returns, of course according to your risk appetite and investment time horizon.
Can I hold foreign securities in my TFSA tax free?
Yes, you can hold foreign securities in your TFSA account, but the mindful of the tax implications.
While the investment income earned in your TFSA won’t be taxed in Canada, it may still be subject to taxes in the foreign country.
Dividends paid by foreign stocks are usually subject to a withholding tax when they are held in a TFSA. The withholding tax is 15% for U.S. stocks for example.
Unfortunately, you can’t claim a foreign tax credit to offset any withholding taxes deducted from your TFSA earnings like you can with non-registered accounts.
An RRSP, on the other hand, will be treated as retirement savings by countries that have tax treaties with Canada. So any income earned from holding stocks in those countries will be exempt from withholding tax.
Related Post: Can You Buy US Stocks In TFSA?
TFSA Withdrawals
Are TFSA withdrawals taxable?
TFSA withdrawals are tax-free. This is another important distinction between TFSAs and RRSPs.
Contributions to TFSA are after tax, so the withdrawals of the contributions and any gains they earn are not taxable.
Learn more: How To Withdraw From TFSA (TFSA Withdrawal Rules)
When can I withdraw from my TFSA?
Unlike RRSPs, TFSAs are very flexible when it comes to withdrawals since there are no withholding taxes. So you can withdraw from your TFSA any time without worrying about any tax implications.
Does TFSA withdrawals affect contribution room?
Simply put, you won’t lose your contribution room because you withdrew from the account. Any amount withdrawn can always be added back.
On the other hand, if you withdraw from your RRSP, the contribution room is lost – except for withdrawals under the HBP and LLP programs.
The only catch is: you have to wait till the following year.
When can I re-contribute the money I withdraw from my TFSA?
Any amount withdrawn from a TFSA can be added back by January 1st of the following year. It is automatic and there is no need to wait until after you file your taxes.
TFSA vs RRSP
What are some of the differences between TFSA and RRSP?
TFSAs have some similarities with RRSP, but there are a number of differences to be aware of.
We’ve mentioned a few of them earlier. The common and most important ones you need to know include:
- RRSP contributions are tax-deductible, but TFSA contributions are not.
- RRSP withdrawals are taxable while TFSA withdrawals are completely tax-free
- The annual limit for TFSA is the same for every Canadian, but RRSP limits are based on each person’s earned income for the previous year.
- RRSP are specifically designed to be used for retirement earnings, though they can also be used to buy a first home under the Homebuyers Plan or pay for education under the Lifelong Learning Program. TFSAs on the other hand can be used for retirement and other financial goals
When is a TFSA better than RRSP?
Choosing between a TFSA and RRSP can be daunting. There is no general answer – the best one ultimately boils down to everyone’s personal situation.
RRSPs are best when you expect that you’ll be in a lower tax bracket during the withdrawal years, that is, in retirement. Otherwise, consider saving using your TFSA.
Here are a few situations where TFSAs are better than RRSP:
- You’re saving for short term financial goals like buying a car, vacation or even down payment for a house.
- Your income is currently low, and you expect it to increase in the coming years. In this case, it’s better to wait till you’re in a higher tax bracket to maximize the tax-advantage of RRSPs. In the meantime, put the money in your TFSA.
Other TFSA FAQs
What are some of the common misconceptions about TFSA?
There are several TFSA misconceptions out there. We wrote about 16 of the common TFSA misconceptions and myths.
Some of the common TFSA misconceptions include:
- TFSA is like a regular bank account
- TFSAs are tax-deductible
- You can only withdraw from TFSA at retirement
- The TFSA annual limit is per account and not per individual
- You can only open a TFSA at a bank; and so on
What happens to the TFSA when I die?
The tax treatment of the investments in a TFSA depends on the whether a beneficiary or successor holder is named on the plan or not.
Here are the options:
Successor Holder: TFSA can be transferred tax-free to a successor holder completely tax-free without affecting their own contribution limit. Your spouse, dependents can be named as successor holder.
Beneficiary: The value of the TFSA as at the date of death will be transferred to them tax-free, but any subsequent gains or income will be taxable.
If no beneficiary or successor holder is named, the TFSA will be added to the estate and probate fees paid. Also, any subsequent increase in the value of the TFSA will be taxable.
To learn more about the topic, check this post on TFSA successor holder vs beneficiary.
How does TFSA withdrawal affect other government benefits during retirement?
TFSA withdrawals are not considered as income for the purpose of income-tested government benefits. So, withdrawing from TFSA will not affect how much you receive from OAS.
This means TFSAs are a great way to minimize OAS clawback.
How to Start Investing in a TFSA
As mentioned above, you can invest in a TFSA using either a managed or self-directed account.
Here are 3 of the best ways to start investing investing with TFSA
1. Questrade
Questrade is an online broker that provides one of the best and convenient ways for Canadians to start investing.
It offers both a managed and self-directed TFSA accounts.
The managed accounts are offered through its Questwealth Portfolios that have an industry low management fee of just 0.25%.
By answering a few questions, you will be matched with one of the 5 different managed portfolios (Aggressive, growth, balanced, income and conservative) depending on your risk appetite and investment time horizon.
Use the link below to get the first $10,000 managed for free for the first year, or get $50 commission rebate for a self-directed account.
2. WealthSimple
WealthSimple is another well known robo-advisor in Canada.
You can invest using its managed account offering, WealthSimple Invest for a management fee starting at 0.5%.
And if you want to get your hands dirty, you can open a WealthSimple Trade account.
Use this link to get two free stocks when you open a WealthSimple Trade account.
Learn more about Wealthsimple TFSA in this review.
3. Your Bank
Investing through your existing bank is another option. Some people prefer this option because they like to keep all their funds in one place.
However, be mindful of the fees on your account. In general, banks and mutual funds have higher fees compared to the online brokerages and robo-advisors.
And with the convenience of pre-authorized deposits, you can do a one-time setup of regular transfers from your chequing account to your TFSA at another financial institution and just forget about it.
Related: Learn how to start investing in Canada for beginners
Conclusion
I hope some of these TFSA guide will get you started and provide you with enough information to open your first TFSA account if you don’t have one.
Check the other posts below to learn more about TFSAs:
- 9 Costly TFSA Mistakes to Know and Avoid
- Data on TFSA Adoption and Usage
