A Complete Guide to TFSA and RRSP
Everything you need to know about your TFSA
Get started with your Tax-Free Savings Account (TFSA), there is no better time to start saving and investing than today! If you recently turned 18 or are new to investing in Canada, opening a TFSA account is an essential part of your investment strategy in Canada.
This article will guide you through the basics of the TFSA and answer the following questions:
What is a TFSA and who can open one?
How much can I contribute and withdraw from a TFSA?
What are the tax benefits of investing through a TFSA?
What is the difference between a TFSA and an RRSP?
Check out the FAQs at the end of the article to quickly get answers to some of the most common questions.
What is a TFSA?
The Tax-Free Savings Account (TFSA) is a flexible, registered, general-purpose savings account that allows Canadians to earn tax-free investment income.
The TFSA was introduced in 2009 to encourage saving and investing by providing tax benefits for a wide range of investment income, including interest, dividends, and capital gains.
You can open multiple TFSA accounts. However, there is a contribution limit for all your total contributions to TFSAs. So just keep track of how much you contribute to each.
Important TFSA dates
January 1st: The annual contribution room is updated.
December 31st: The last day to contribute for the current year.
Who can open a TFSA?
To open a TFSA, an individual must meet the following three requirements:
Be a resident of Canada
Be 18 years of age* or older (19 in some provinces)
Have a valid Social Insurance Number (SIN)
*Note: The age of majority is 18 in most provinces, but it's 19 in British Columbia, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, and Yukon, which may delay the opening of a TFSA until that age.
How to open a TFSA?
Opening your TFSA account can be done 100% online in a matter of minutes.
Register using your phone number or email address.
Prepare your residential address and SIN documents.
Fill in your personal details and sign with your full name.
Submit your application.
Account approval typically takes 1-3 business days.
Once your TFSA is approved, you will be notified via email and notification.
What are the benefits of your TFSA?
There are many benefits of using a TFSA to save:
Added Flexibility: TFSAs offer flexibility, allowing you to save for any duration and invest according to your risk tolerance. You can withdraw your funds anytime without any penalties or mandatory withdrawals. Additionally, your contribution room begins accumulating from the year you become eligible, even if you haven't opened a TFSA yet. You can make up for any missed contributions from previous years.
Tax-Free Growth: You pay no tax on any investment income you may earn in your TFSA and you can hold a variety of qualified investments. The higher the return potential on your investments, the faster your savings may grow, tax-free.
Retirement Planning: A TFSA can complement your personal RRSP by providing additional tax-advantaged savings when you have no more RRSP contribution room. Unlike your RRSP which has mandatory withdrawals if you are over age 71, you can keep saving in your TSFA forever.
Making Withdrawals: You can withdraw funds from the TFSA without paying tax or penalties. This can make the TFSA a great way to save for big-ticket items, like a new car or a deposit on a new home. When you're ready to use your funds, you can withdraw without paying any taxes.
Contribution Limits: Unused contribution room can be carried forward to future years. This means that if you do not contribute the maximum limit this year, you can make up for it by contributing more next year. Just be careful not to exceed the total contribution limit for your account.
Diversified Investment: You can have a variety of investments within TFSAs, which is useful for diversifying your portfolio.
No Cost Basis: Don't worry about your cost basis, your profits are tax-free.
What you can hold in your TFSA
Cash
Canada Stocks & Foreign Stocks*
Mutual Funds
Exchange Traded Funds (ETFs)
Index Funds
Guaranteed Investment Certificates (GIC)
Bonds
Certain shares of small business corporations
Securities listed on a designated stock exchange
*Note: Foreign dividends may be subject to a non-recoverable withholding tax.
What are the limitations of your TFSA?
Contribution Limit: Everyone eligible in Canada receives the same contribution room each year, which can add up year over year. However, the limit does not scale with income and many high earners will find that they quickly reach the limit.
High-Risk Growth: The contribution amount of a TFSA is limited, however there is no limit on the amount of funds you can hold in the account that has grown over time from the original amount contributed. Seeking higher returns from high risk investments will increase your benefits from your TFSA over time.
Tax-Efficiency: A TFSA is better for holding assets with higher tax rates, such as interest income and dividends, which tend to be less risky but may also offer lower returns.
Foreign Dividends: U.S. and other foreign dividend paying stocks may be subject to a foreign withholding tax that is not recoverable through your TFSA.
No Income Tax Deductions: There are no tax benefits by reducing your yearly income taxes payable, compared to RRSPs.
How much can I contribute to my TFSA each year?
The contribution room for a Tax-Free Savings Account (TFSA) builds up annually, even if you haven't opened a TFSA. If you are a Canadian resident, your contribution room begins accumulating from 2009 or from the year in which you turned 18. For example, if you are 18 or older in 2009, in 2024 you would have a total available contribution room of $95,000.
Note: The investment income earned in your TFSA does not count towards your contribution limit. Only the original funds deposited into your account count towards your limit.
Example: Calculate your TFSA limit
Brayden turned 18 in December, 2022. The contribution limit for each year is:
2022: $6,000
2023: $6,500
2024: $7,000
On January 4, 2023, he opened a TFSA and contributed $12,500.
$6,000 for 2022 plus $6,500 for 2023 – the maximum TFSA dollar limits for those years.
By the end of 2023, the value in Brayden’s TFSA had increased to $12,900.
Brayden was concerned that for 2024, he would only be able to contribute $6,600 rather than $7,000 because his investment grew by $400.
Question: Is Brayden's concern reasonable?
Answer: No, neither the earnings in your account nor the increase in its value will reduce the TFSA contribution room in the following year. Therefore, Brayden can contribute up to $7,000 in 2024 to his TFSA.
Note: This example is a theoretical scenario and should not be considered investment advice.
What you need to know about TFSA withdrawals
Withdrawals are tax-free and can be made at any time for any purpose, without penalty. The amount withdrawn is added back to your contribution room at the beginning of the next calendar year, offering a unique advantage over other savings accounts.
Withdrawing money from a TFSA doesn’t have to be permanent — you can recontribute this amount in future years. You can use this money for big purchases, such as a new car, home repairs or emergency payments.
If you've withdrawn from your TFSA this year, a practical formula for checking what your next year's contribution room is:
Unused room + New Room + Previous Room (total withdrawal made this year) = TFSA Room (at the beginning of next year)
What is the difference between a TFSA and RRSP?
You may find yourself in the position of choosing between opening and contributing to your TFSA or making a contribution to your RRSP. While both TFSAs and RRSPs are registered savings accounts, there are some notable differences you may want to consider. Here is a summary of the key points.
The good news is you can always open and contribute to both types of accounts. The hard part is deciding where to get started and creating an investment strategy for each account. You can refer to the following flowchart to see what type of account best meets your current investment objectives.
FAQs
How many TFSAs can I have?You can have multiple TFSAs, but the contribution room is shared across all of your TFSAs. The total contributions across all your TFSAs cannot exceed your available contribution room for the year. To avoid penalties, it is vital to track your contributions and ensure you do not over-contribute.
Can I keep my TFSA if I move to the United States?If you move to the United States and become a non-resident of Canada, you can retain your TFSA. You will not gain additional contribution room for the years you are a non-resident. If you are simply moving to the U.S for the winter and remain a resident of Canada, then your TFSA will continue the same as before.
It's important to note that contributions to and earnings within your TFSA may be subject to U.S. tax laws. The tax treatment of TFSAs in the U.S. can be complex, and it is advisable to consult with a tax professional who specializes in cross-border taxation to understand the implications and reporting requirements based on your specific circumstances.
Can I buy foreign investments in my TFSA?
If you choose to hold foreign investments in your TFSA, many governments — including the U.S. — apply a non-resident withholding tax to the foreign source income received. Those tax amounts aren't recoverable and may reduce your potential returns. For example, the IRS imposes a 30% withholding tax to dividends paid on U.S. stocks, which can be reduced to 15% by submitting a W-8 BEN or W-9 form to the IRS.
