What Is a TFSA?
A TFSA, or Tax-Free Savings Account, is a registered account in Canada that lets residents earn investment income, such as interest, dividends and capital gains, without paying tax on it. Money can be withdrawn at any time without tax, and the amount withdrawn is added back to your contribution room the following year. The name can mislead, because a TFSA can hold investments as well as cash.
How it works
- Contribution room: each year the government adds a set amount to your room once you are old enough. Unused room carries forward. Over-contributing can lead to penalties.
- No tax deduction: contributions are made from after-tax money, so they do not reduce your taxable income.
- Tax-free growth and withdrawals.
- Flexibility: you can withdraw whenever you like, and recontribute in later years.
- No effect on most benefits: withdrawals are generally not counted as income for income-tested benefits.
The annual limit and your personal room change and depend on your history, so check your account on the tax authority's website.
What you can hold
Savings deposits, guaranteed investment certificates, mutual funds, exchange-traded funds, bonds and stocks can be held in a TFSA at a bank, credit union or brokerage. Choose according to your goals and risk tolerance.
Why students use TFSAs
- Savings with flexibility for tuition, travel or emergencies.
- Long-term investing for retirement or a home.
- Tax-free growth without a need to claim income.
- Easy access compared with some other registered accounts.
Cautions
- Track your room so that you do not over-contribute.
- Watch for fees and low interest on some accounts.
- Understand investment risk, since values can fall.
- Non-residents have different rules and may face penalties on contributions.
TFSA versus RRSP and FHSA
The RRSP is a registered retirement account with tax-deductible contributions and taxable withdrawals. The FHSA is for saving for a first home, with deductible contributions and tax-free qualifying withdrawals. Each has its own rules and limits.
Related accounts abroad
Similar accounts include the ISA in the UK and the Roth IRA in the US.
Related terms
See ISA, Roth IRA, compound interest, inflation and direct deposit.
Frequently asked questions
Who can open a TFSA?
Canadian residents who are 18 or older and have a valid social insurance number. Provinces may set the age of majority at 19, so check eligibility with your provider.
How much can I contribute?
Each year gives you additional contribution room, which accumulates if unused. The annual limit is set by the government, so check the current number and your personal room.
Is a TFSA the same as a savings account?
No. A TFSA is a registered account that can hold savings, GICs and investments. A savings account is one possible holding inside it.