Tax-free savings accounts (TFSAs) are designed to help Canadians save more. A TFSA can help you save and invest for any future goal. Learn how they work and how much you can save in each year.
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What is a TFSA?
A tax-free savings account (TFSA) can hold either savings or investments, or both. It is tax-sheltered, which means your savings and investments grow tax-free as long as your money stays in the account.
A TFSA is a versatile way to save for a variety of financial goals. Your money grows tax-free while it stays in the account. Most types of investments can be held in a TFSA, including Guaranteed Investment Certificates (GICs), bonds, stocks and mutual funds.
Any Canadian aged 18 years or older can open a TFSA. And you can keep the account for as long as you wish. A TFSA can be used for specific or multiple goals over your lifetime. For example, you could use it to build an emergency fund of several months’ worth of savings. Or your TFSA could be part of your retirement savings plan, alongside an RRSP or other sources of retirement income.
In Canada, there are several types of tax-sheltered accounts that can be used for different types of goals. Learn more about RRSPs, RESPs, and RDSPs which can help you save or invest for specific long term goals.
How much can you save in your TFSA?
TFSAs have an annual contribution limit. The contribution limit is indexed to inflation, which means the contribution limit will sometimes increase from one year to another. The contribution limit is the same amount for all Canadians.
You can put money in at any time, up to set limits. You can take money out at any time, without paying any tax. If you don’t contribute the full amount each year, you can carry forward the unused amounts, based on the contribution limits for each year. Learn more about TFSA contributions.
How do you find out your TFSA contribution room?
Your contribution room starts accumulating the year you turn 18. If you were already 18 or older in 2009, the year the TFSA started, then you have accumulated contribution room every year since 2009.
You can easily find out your TFSA contribution room by:
- Checking your CRA My Account. This will show you your available contribution room for your TFSA as well as your RRSP, as of the previous year.
- Checking your Notice of Assessment. After you file your taxes each year, you receive the Notice of Assessment confirming your refund or taxes owing, as well as other information including your RRSP and TFSA contribution room.
Here are the annual TFSA contribution limits since 2009:
| Year | Contribution |
|---|---|
| 2009 | $5,000 |
| 2010 | $5,000 |
| 2011 | $5,000 |
| 2012 | $5,000 |
| 2013 | $5,500 |
| 2014 | $5,500 |
| 2015 | $10,000 |
| 2016 | $5,500 |
| 2017 | $5,500 |
| 2018 | $5,500 |
| 2019 | $6,000 |
| 2020 | $6,000 |
| 2021 | $6,000 |
| 2022 | $6,000 |
| 2023 | $6,500 |
| 2024 | $7,000 |
Caution
TFSA issuers have until the end of February to share TFSA records for the previous year, with the CRA. This means that within the first couple of months of the calendar year, your CRA MyAccount will show available contribution room for the current year plus the previous year. It won’t take into account your previous-year contributions until after February.
So, if you check your TFSA room in January, for example, you could end up assuming you have more contribution room available than you really do, because the information won’t be accurate yet.
When can you take out money from your TFSA?
You can withdraw money from your TFSA at any time, for any reason. It will not be considered taxable income when you withdraw it. Taking money out of your TFSA does not reduce your contribution limit for the year.
However, if you contribute again during the same year, but don’t have available contribution room, you will have over-contributed. This means that if you max out your TFSA contributions, then take money out of the account, you should wait until the next year to put money back into the account. Otherwise, if you put back the money back in right away, this will count as going over the limit.
Over-contributions are taxed at 1% of the highest excess TFSA amount for each month that it stays in the account. Learn more about making or replacing withdrawals from a TFSA.
Can you transfer money between TFSAs?
If you have more than one TFSA, you can transfer funds between them. It won’t affect your TFSA contribution room — as long as the transfer is done directly between the TFSAs. Speak to your financial institution or investment firm to find out how to do this. Learn more about the rules for making transfers between TFSAs.
Caution
If you withdraw money yourself from one TFSA and contribute that amount to another TFSA, it will be considered a separate contribution – not a transfer. That contribution will reduce, and may even exceed, your TFSA contribution room for the year. If you over-contribute, you’ll pay a penalty.
Can you transfer your TFSA to a different financial institution?
You can transfer TFSAs from one institution to another. It’s a good idea to ensure your current financial institution initiates the direct transfer on your behalf. Otherwise, if you withdraw money from one TFSA and deposit it into a different TFSA yourself, it could be interpreted as an over-contribution. Talk to your financial institution for more information if you’re thinking about moving your TFSAs.
What are the penalties for breaking TFSA rules?
There are a few situations where you could end up paying penalties or taxes on your TFSA savings or investments:
- Over-contributions – If you contribute too much to your TFSA, you’ll pay a penalty of 1% per month on the excess amount until you remove it. If you over-contribute deliberately, you’ll pay a 100% tax on any gains or income you make on the excess amount.
- Prohibited and non-qualified investments – Any gains or income you make from holding these investments in your TFSA will be taxed at 100%. For example, shares of a company in which you have a significant interest (10% or more).
- Asset transfer transactions – You’ll pay 100% tax on any gains made by swapping investments between your TFSA and a registered or a non-registered account. This is to discourage people from using their TFSA to realize gains on investments that would otherwise be subject to tax. For example, if you swap cash in your TFSA for an investment from your RRSP.
Take a look at these examples to learn more about how Canada Revenue Agency (CRA) calculates tax penalties on over-contributions to TFSAs.
Summary
A tax-free savings account offers a flexible way to save or invest for the future, for any Canadian 18 years or older. Remember:
- You can save tax free for any goal you want (car, home, vacation).
- You don’t need earned income to contribute, and you don’t have to set up a TFSA or file a tax return to earn contribution room.
- All Canadians have the same TFSA contribution room each year. The annual contribution limit is indexed for inflation, which means some years the contribution room will increase as inflation goes up.
- You can put money into your spouse’s or common-law partner’s account.
- You can take money out when you want, for any reason, without paying any tax. If you take money out, you can re-contribute it the following year, in addition to the annual maximum.
- You can hold a wide range of investments in a TFSA, like cash, GICs, bonds, stocks and mutual funds.
