TFSA basics — the ABCs of TFSAs

A tax-free savings account (TFSA) is a general investing account that can help you save for many of your short or long-term needs.

A TFSA is among the most popular investing options for Canadians and it’s important to learn how to best use it to your advantage.

Below you’ll find information about: 

  • What is a TFSA? 
  • The difference between a TFSA and RRSP 
  • The benefits of TFSAs
  • What type of investments can you hold? 
  • How much you can contribute each year
  • Where to learn more about TFSAs

What is a TFSA? 

In terms of versatility and freedom, no investing account comes quite close to a TFSA. A tax-free savings account provides a tax-sheltered way to save for long-term and short-term goals. The bonus is that earnings from your investments and withdrawals from a TFSA account are non-taxable. That means all the interest you gain from your investments is yours to keep when you withdraw funds. 

Who is eligible for a TFSA? 

Individuals with a valid Canadian Social Insurance Number who are 18 years of age or older and who live in Canada are qualified to open a TFSA. 

The difference between a TFSA and RRSP? 

The TFSA and RRSP are arguably the two most popular investment options amongst Canadians and for good reason. The RRSP is an ideal way to save for your retirement while providing a tax deduction on your current earnings. The strength of a TFSA is its versatility as it can help towards your retirement, a new car, rainy day savings, and more. 

The key difference between the two is that with a TFSA, contributions are made with after-tax income and money withdrawn from the account is non-taxable. With an RRSP, contributions are made with pre-tax income and money withdrawn from the account will be taxed. 

What are the benefits of a TFSA? 

A TFSA provides many benefits but here are a few that stand out:

  1. Liquidity makes this account more versatile. A TFSA allows you to withdraw funds at any time which means a wider range of investing options. You can go for low-risk or high-risk investments over the short or long-term.
  2. Tax-sheltered income. Any income, dividends and capital gains you earn on your investments while in the TFSA will be tax sheltered. Unlike an RRSP that requires you to pay taxes on your withdrawals, all TFSA withdrawals are completely tax-free. That means you keep all the money you make from your investments.
  3. Eligibility is much easier with a TFSA. If you meet the basic requirements of being 18 years or older with a valid SIN number, you can make contributions. That means you don’t need to be currently working to make investments with a TFSA. 

What is a Self-Directed TFSA? 

A self-directed TFSA is where you control the types of investments made in your TFSA account. You manage buying and selling, oversee price fluctuations, and more. 

What type of investments can I hold in a TFSA? 

You can hold the following investments in a TFSA: 

  • Stocks and exchange-traded funds (ETFs) listed on a designated stock exchange*
  • Mutual funds*
  • Bonds*
  • Guaranteed Investment Certificates (GICs)
  • Cash

How much can I contribute to my TFSA?

The contribution limit for your TFSA account may change from year to year.  You can find information on a particular year's contribution limit on your Canada Revenue Agency account. The annual contribution limit for 2024 is $7,000. A benefit of a TFSA is that unused contribution room from each year since you turned 18 carries forward and stacks. For example, if you were 18 years old in 2009, then your total TFSA contribution limit as of 2024 would be $95,000. 

What happens if I go over the contribution limit? 

If you have gone over the contribution limit, you will be charged a 1% tax based on the over-contribution amount. The tax is calculated based on the highest excess TFSA amount in your account each month and that continues for every month going forward until you are no longer exceeding your limit. 

Where to learn more about TFSAs

Remember, you’re never too young or too old to invest. A TFSA allows you to invest for your goals and gives you the freedom to withdraw at anytime without having to pay taxes. Take advantage of compounding interest, start investing today! For more information on TFSAs visit the TFSA section of the Canada Revenue website. Learn more from an Aviso Resource here.

Looking for investment and financial advice? Our Innovation Wealth team would be happy to help with your investment planning, reach out to a Wealth Advisor today.

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*Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. 

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