Did you know that the tax-free savings account — a TFSA, is not just a savings account? There’s more to a TFSA than just putting money in an account and leaving it there. If you wonder what a tax-free savings account is or are looking to open one, this guide explains everything you need to know.

What is a TFSA

A tax-free savings account is a registered account for saving (and investing). The Canadian government encourages Canadians to save through the TFSA introduced in 2009. While it is called a tax-free savings account, you can use the TFSA to invest and grow your money tax-free.

Here’s how growing your money in a TFSA tax-free works.

Let’s assume you open a tax-free savings account and invest $1,000 in stocks. If after a year, your $1,000 gets valued at $3,000, you have a capital gain of $2,000. Generally, the Canada Revenue Agency (CRA) taxes 50 percent of realized capital gains. However, because the TFSA is a tax-advantaged account, the CRA will not tax your capital gains.

Now that you know the primary benefit of a tax-free savings account, here’s how you can open one.

How To Open a Tax-Free Savings Account

Opening a TFSA is straightforward. You need to be a resident of Canada, at least 18 years old, and have a Social Insurance Number (SIN) to open a TFSA.

Some provinces require you to be at least 19 years of age to open a TFSA. Check with your financial institution if you can open a TFSA when you turn 18.

You can open a tax-free savings account by walking into a bank, credit union, trust company, or insurance company. Alternatively, you can open a TFSA online or through the phone.

You do not need a lot of documentation to open a TFSA. However, the TFSA provider may request pieces of government-issued identification that show your name, picture, date of birth, and address.

If at any time you become a non-resident of Canada, The CRA will tax your TFSA contributions at 1% tax for every month the contribution remains in the account.

The TFSA Contribution Limit

There is a limit to how much you can contribute to your tax-free savings account every year. This limit is also known as a TFSA contribution room. If you do not use up your contribution room in a year, you can carry the balance over to the following year. Your unused TFSA contribution room accumulates every year.

If you live in a province that only allows you to open a TFSA from 19 years of age, you can still accumulate your TFSA contribution room from when you turn 18.

For previous years, the TFSA contribution limits are:

  • 2009 to 2012 – $5,000
  • 2013 and 2014 – $5,500
  • 2015 – $10,000
  • 2016 to 2018 – $5,500
  • 2019 – $6,000
  • 2020 – $6,000
  • 2021 – $6,000

The annual TFSA dollar limit for 2022 is $6,000.If you have maximized your TFSA contributions since 2018 and haven’t contributed to your tax-free savings account since then, you will have a $24,000 total contribution room in 2022. (The sum of your unused contribution limits from 2019 to 2022).

You can have multiple TFSA accounts. However, if you contribute over your accumulated TFSA contribution limit, the CRA will tax your excess contributions at 1% for every month the amount remains in your tax-free savings account.

Withdrawing From Your Tax-Free Savings Account

You can withdraw from your TFSA at any time, and there are no limits to how much you can take out of your account. The CRA will not tax your withdrawals. Depending on the type of investment asset you have in your TFSA, you may pay fees to your financial institution when you withdraw from your TFSA.

When you withdraw from your tax-free savings account in a year, your contribution room does not increase by that amount in the year you make the withdrawal. Instead, your contribution room will increase by your withdrawal amount in the following year.

For example, suppose you do not have any more contribution room in the year, and you withdraw $2,000 from your TFSA. Your withdrawal does not free up $2,000 room in the year you make the withdrawal.

If you contribute any amount to your TFSA in the year, you will pay taxes. However, in the following year, in addition to the annual TFSA limit, you can contribute an extra $2,000, which is available room due to your withdrawal in the previous year.

When you transfer your TFSA from one issuer to another, this does not count as a withdrawal and will not impact your contribution room. This type of transfer is called a qualifying transfer. Your TFSA issuer needs to make the transfer for it to count as a qualifying transfer.

Investing Through Your TFSA

You can keep your TFSA contributions as cash or invest your money in allowable investment assets such as stocks, bonds, real estate investment trusts, guaranteed investment certificates (GICs), exchange-traded funds (ETFs), and mutual funds.

When you open a tax-free savings account, your TFSA provider will invest your money for you based on your investment objectives and risk appetite. You can also open a self-directed TFSA if you know how to invest in financial assets and manage your investment portfolio.

While you can grow your money through investment assets in a TFSA, you can also lose money if the value of your investment assets decreases. Capital losses in your tax-free savings account do not increase your TFSA contribution room.

For example, if you invest $10,000 in your TFSA, and the value of your investment decreases to $7,000, your contribution room does not increase by $3,000.

What Can You Use Your TFSA For?

You can use your tax-free savings account to save for a house down payment, education, or travel. You have the liberty to use your money in a TFSA for anything you want; there are no limitations.

Summary on TFSAs

You can invest and grow your money tax-free through a tax-free savings account. The TFSA contribution room limits how much you can contribute to your TFSA in a year. Your contribution room accumulates if you do not contribute the total amount in the year. Unlike the registered retirement savings plan (RRSP), your contributions to a TFSA do not qualify as tax deductions.