Budgeting, saving and investing for a brighter financial future

Five things you may not know about TFSAs

By Denise Barrett,

Comments (30)

Five things you may not know about TFSAsThe Tax-Free Savings Account (TFSA) lets you stash extra cash for just about anything — rainy-day savings, a new house or retirement — without paying any tax on the growth within the account or on withdrawals.

Still, since the TFSA was introduced in 2009, it’s estimated that only around half of Canadians have opened one. Here are five of the most common misunderstandings about the TFSA:

1. It’s called a savings account, but can hold just about anything

From our earliest days, a “savings account” was where our pennies went when they came out of the piggy bank. The name suggests deposits, safety and low rates. But almost any investment you can hold in a registered retirement savings plan (RRSP) can also go into your TFSA: bonds, stocks, mutual funds, exchange-traded funds, options, etc.

Personal finance expert and author Kelley Keehn is among those who wish the government had chosen a different name for the TFSA. “Many banks and financial institutions advertise a set percentage for their cash TFSAs and it’s very low,” she says. “Canadians see the 2% and think ‘those TFSAs don’t pay much.’ In reality, the TFSA is a savings shelter like an RRSP and you need to choose the investment that goes within it.”

2. You can re-contribute your withdrawals — but not until the next year

In the first years of the TFSA, there were many stories about Canadians accidentally over-contributing and facing penalties from the Canada Revenue Agency (CRA). Most problems came from a simple misunderstanding.

Some early owners used the TFSA like a conventional savings account, making frequent withdrawals and deposits. If the total of all deposits exceeded the annual limit, they had over-contributed.

In other words, each time you deposit funds it counts as a contribution regardless of the total amount in the account. If you deposit $10,000 and then withdraw it and deposit again in the same year, you are considered to have contributed $20,000. Moving a TFSA from one financial institution to another by withdrawing and then re-depositing may trigger an accidental over-contribution. Making a transfer avoids that problem.

So far, the Canada Revenue Agency has been forgiving, waiving penalties if you say it was an accident and promise not to do it again, but there is no guarantee they will continue to do this in the future.

The CRA tells you your annual contribution limit – just like your RRSP limit — on the notice of assessment it sent you last year after processing your tax return. Each year’s contribution limit is the total of three amounts:

3. You can’t lose contribution room

If you’ve never opened a TFSA, you can contribute up to $41,000 today — $5,000 for each year from 2009 to 2012, $5,500 for each of 2013 and 2014, plus $10,000 for 2015 onwards. Plus, you never lose contribution room, regardless of your age (unless you are a non-resident of Canada for an entire year, during which time you will not accumulate contribution room). And speaking of age, you must be at least 18 (and have a valid social insurance number) to open a TFSA.

You may not have money today, but many Canadians will reap a mid-life windfall from an inheritance, downsizing a home, severance or insurance payouts. Putting such proceeds into a TFSA (provided they do not exceed the available contribution room) can help shield their future growth from income tax.

“Unused contributions from each year can be carried forward, and withdrawals will [usually] result in new contribution room,” notes Krystal Yee, personal finance blogger at Give Me Back My Five Bucks. So if you withdraw $41,000 from your TFSA this year to put towards the down payment on a home, you will have $51,000 in contribution room next year (the $41,000 you took out plus another $10,000 for 2016). “It can be really confusing because we’ve never had a savings vehicle like this before.”

4. You don’t have to be a big saver

You can use a TFSA for your existing savings, even if they are relatively modest. As long as you don’t lock the funds into a non-redeemable investment such as a guaranteed investment certificate that can only be redeemed upon maturity, you will be able to access the money at any time. This also makes a TFSA perfect to use as an emergency fund. You will have the security of knowing the money will be available if you need it.

5. You don’t have to choose between a TFSA and an RRSP.

There are many clever ways to make the TFSA and RRSP work together to improve your wealth. As a general rule, RRSPs are a good choice for longer-term goals such as retirement, while TFSAs work better for more immediate objectives, such as a house down payment. A TFSA is also a good place to save if you have reached your RRSP contribution limit.

Learn more about TFSAs:

Income tax Get more smart tips for tax time.

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micky oostra on

is there a maximum amount you can accumulate in your TFSA? I am not asking about contributions but the total amount that sits in your TFSA after years of contributing and investment yield. A rep at my bank said something to that effect and didn’t understand why I asked.

Ryan Ford on

Unlike RSPs you don’t have to convert TFSAs into RRIFs when you retire, you can take as little or as much as you want. The part I don’t like is you have to make an arrangement to withdraw.

Brian Poncelet,CFP on

TFSA’s is really the same as the US’s ROTH IRA. If you want unlimited (close to) tax free growth you need to look at life insurance.

Annette Taylor on

I don’t believe one’s TFSA contribution limit is actually stated on the Notice of Assessment. Verbiage is added to direct the taxpayer to the government’s site, to find out what their actual dollar limit is. When the TFSA was first introduced, it was stated on the Notice of Assessment, but not in current years.

Canadianbudgetbinder on

I knew all of the above from research, writing about TFSA’s and owning them and they are a great way to hold money and invest. I on the other hand since being new to Canada from the UK have plenty of RRSP room to use up so investing in the RRSP for the long-term is my focus while still participating in the TFSA.

ken warner on

Great Info But at what age can you open a TFSA ?? Thanks

Ars Butus on

How about the next time the accompanying photo to a Canadian investment article is one that actually shows Canadian coins instead of American ones?

“Here are five of the most common misunderstandings about the TFSA”. Really? Determined on what basis I wonder? No mention for instance that these contributions unlike RRSPs are not tax deductible but a lot of people think they are. No mention of what happens to a TFSA upon the death of a TFSA holder. Things get complicated regarding beneficiaries, successor holders, etc. here is a link to the CRA for more info that people should be aware of. It would have been wise had such a link been included in the article:

    Anne Levy-Ward on

    This wasn’t meant to be an exhaustive, comprehensive list of absolutely everything you need to know about TFSAs, but rather simply some high-level details around some common issues, so we sincerely appreciate your contribution to the discussion, and thank you for the link you provide.

microsnout on

Somewhere in Canada someone has, without realizing it, the most valuable TFSA account. An interesting investment competition as unlike RRSPs, everyone in the country started with the same contribution limitations.

nsd on

no mention on the age requirements to open such an account???

david taylor on

Incorrect. If you contribute $5000, buy a stock at $1.00, the stock goes to 10 cents, now you have $500 in value. If you sell the stock and withdraw $500, you can only recontribute $500, not $5000.

ScottishStephen on

TFSAs should be used to replace RRSPs unless your earning over $50,000 a year by your mid 30′s and anticipate a significant increase in wages as you get older.
Having a TFSA used as a short term savings vehicle is ludicrous. TFSAs should be regarded as the last place you would want to pull money from. They can be left tax free to beneficiaries unlike an RRSP.. .If you die and your spouse has died or you did not have a spouse, the tax man can take around 47% of your savings from your RRSP when its closed. What is the point in that… Your better to draw your RRSP down fully in retirement before touching the TFSA.
If you’re a millionaire who is happy to just earn $32,000 a year and live off 4% dividends from the million dollar portfolio, a non-registered account makes sense if you have dividend paying investments like preferred shares or common stock.. And if you wash your capital gains with capital losses then you could avoid paying any tax whatsoever on your returns. This is why many Billionaire CEOs declare only a $30K salary once they have made all their money and want to avoid taxes later in life.

    Wayne Morley on

    We know that we can’t transfer money from RRSPs into TFSAs without first paying the income tax on the amount transferred, the gov’t just isn’t going to let us off the income tax hook. So for young investors, this TFSAs might be a good place to put “mutual funds” (or other investments) , instead of putting them in RRSPs. The trade off being: (1) you get an immediate reduction in your taxable income with RRSPs, you don’t with TFSAs (2) Versus, when you remove your money from an RRSP you increase your taxable income by the full amount (the principal and the interest earned over the years) whereas with a TFSA you have already paid income tax on the principal, but you now get the interest tax free. And remember, you will be in a higher tax bracket when you retire and want that RRSP money. Believe me, it hurts when you want to buy something for say, $50,000 and you want to use that wonderful RRSP that you saved for all your working life. You now increase your taxable income by $50,000 and you are probably in a very high tax bracket. You might need to withdraw $70,000 to make that purchase. I am older, the only benefit of the TFSA for me has been to put my “speculative stocks” in a TFSA. Now if my 25 cent shares rocket to $8, my $7.75 profit is not taxable. If you have 50,000 shares of some penny stock that does this, you would have $387,500 profit that is NOT taxable. Spec. stocks are not a good investment but for some of us older folks we have some “play around” money, I wouldn’t advise younger folks to be doing this as an investment for the future. Anyway, you see my point I hope. There is a tremendous tax advantage if you are fortunate enough to have an investment that multiplies many times (in the TFSA), but to put your investments that are only going to make 2 or 3 percent in there (regular type bank accounts etc.), they have very little tax advantage over your lifetime. Mutual funds or something like that are probably a good thing for young folks to get involved in, as they typically make decent profits over a long period.

      Wayne Morley on

      To the Moderator, I apologize if this should have been a separate item rather than a reply to ScottishStephen.

Christine Bint. on

could i take $ from my RSP and transfer to TFSP without pentalty ! an would this be benfit to me. I don’t have a financial planner and this is all the investment I have.Want to make sure it bring the best and most return.

    Denise Barrett on

    Hi Christine. If you take money out of an RRSP, you will need to pay tax on it. And while you are unable to directly transfer money from an RRSP to a TFSA, you can still open a TFSA and get started with that type of investment.

L. Brown on

Great article! Certainly provided a lot of clarity on what TFSAs are all about!

Barb Wagner on

Excellent article! Very well written and informative. Thanks!

Jennifer Houston on

Great article! Thanks for shedding some light on this subject!

Andrea Di Tomaso on

Great article! Really informative!

C. Rees on

Very good article and easy to understand!

Kris Goberis on

This article made it very easy for me to understand the TSFA. Thanks for the info. about TSFA vs. RRSP’s and the fact that it doesn’t have to be vs.

David Rawlings on

Thanks for this clarifying message! I’m on my way to my Branch to open one.

Jeff Griese on

Succinct, informative, well-written article.

Malcolm Gomes on

Great article, very well written, easy to understand and thoroughly enjoyable to read.

Linda Favacho on

Very informative article – thanks!

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