TFSA Explained: The Ultimate Guide

The Tax-Free Savings Account, or TFSA, is a special type of investment account that provides tax benefits for Canadians. The main tax benefit of this type of account is that investment income earned in a TFSA is not taxed upon withdrawal.

It was introduced in 2009, and is very similar to the United States Roth IRA or UK Individual Savings Account.

How The TFSA Works

The premise of the TFSA is that it is an investment option for Canadians residents who want to invest and grow their money tax-free.

The TFSA is designed to be a flexible investment account that allows the account owner to withdraw money at any time from the account, and not pay taxes.

The premise of the account is that you use after-tax income, and so when you deposit money into the account, you can also withdraw it tax-free.

The benefit is that you get to avoid taxes on capital gain, interest, and dividends on the money that is saved or invested in the account.

Benefits of the TFSA

As mentioned, the biggest benefit of the TFSA is that your assets can grow tax-free inside the account and unleash the power of compound growth.

Inside the TFSA account, you can hold all of the same investments you could under the RRSP, including publicly traded stocks, bonds, mutual funds, and real estate investment trusts (REITs).

Because of the tax-free benefit of the account, you can invest in a stock, watch it grow, earn dividends, and then withdraw any earnings on the stocks at any time and not pay taxes on the capital gains. This represents significant potential savings for investors.

With its introduction, the TFSA has become a strong competitor to the RRSP in the realm of tax-free growth. Both are great vehicles and you need to understand the usage for the long and short-term.

Related: How To Maximize Your RRSP.

The Rules of the TFSA

The biggest rule of the TFSA is the amount that you can contribute each year. See how much money you can generate over time.

wdt_ID Year Yearly Limit Cumulative 5% Growth 10% Growth Dividend Earner Spousal
1 2009 5,000 5,000 5,250 5,500 Not Tracked Not Started
2 2010 5,000 10,000 10,762 11,550 Not Tracked Not Started
3 2011 5,000 15,000 16,550 18,205 Not Tracked Not Started
4 2012 5,000 20,000 22,628 25,525 Not Tracked Not Started
5 2013 5,500 25,500 29,534 34,128 $41,742 Not Started
6 2014 5,500 31,000 36,786 43,590 $52,820 Not Started
7 2015 10,000 41,000 49,125 58,949 $56,307 Not Started
8 2016 5,500 46,500 57,356 70,984 $70,200 Not Started
9 2017 5,500 52,000 65,999 84,034 $78,900 $13,308
10 2018 5,500 57,500 75,074 98,487 $96,937 $58,818
11 2019 6,000 63,500 85,128 114,986 $129,467 $82,596
12 2020 6,000 69,500 95,684 133,030 $153,993 $95,906
13 2021 6,000 75,500 106,769 152,933 $181,601 $113,194
14 2022 6,000 81,500 118,407 174,827 $169,702 YTD $128,018 YTD
15 2023 6,500 88,000 131,152 199,459
16 2024 6,500 94,500 144,536 226,555
17 2025 6,500 101,000 158,587 256,361
18 2026 6,500 107,500 173,342 289,147
19 2027 7,000 114,500 189,359 325,762
20 2028 7,000 121,500 206,177 366,038
21 2029 7,000 128,500 223,836 410,342
22 2030 7,500 136,000 242,902 459,626
23 2031 7,500 143,500 262,923 513,838
24 2032 7,500 151,000 283,944 573,472
25 2033 7,500 158,500 306,016 639,069
26 2034 7,500 166,000 329,192 711,226
27 2035 7,500 173,500 353,526 790,599
28 2036 7,500 181,000 379,078 877,909
29 2037 7,500 188,500 405,906 973,950
30 2038 7,500 196,000 434,077 1,079,595

It’s worth noting that the TFSA has a carry-over aspect to it, which means that you can roll over any unused contribution to the following year.

However, even though you can withdraw anytime you would like, you still cannot contribute more than the TFSA contribution limit plus previous carry over in the current year. There is not “reinvestment” option during the same year, you have to wait until the next calendar year.

To start using a TFSA account, you need to be at least 18 years old. From that point on, your contribution room starts accumulating, unlike an RRSP which requires you to earn income before you can leverage the account. For more details on opening a TFSA account, see the Canadian Revenu Agency website.

How it Compares to Other Investment Accounts

The TFSA is different than most other investment accounts because of the tax savings that it provides to investors and it is essentially the opposite of the RRSP account from a tax perspective. 

In the RRSP, you get a tax deduction for contributions, essentially making the contributions pre-tax money, but at that the same time, you have to pay taxes on withdrawals.

The gamble is whether you believe taxes will be higher now or in the future. If you think you will pay higher taxes now, the RRSP makes sense because of the current tax savings you receive. If you think taxes will be higher in the future, using the after-tax money now and not paying on withdraws makes sense for the TFSA.

The choice of which account to use becomes a regular topic of discussion as it hinges on predicting your future. The dilemma around TFSA or RRSP first is there for everyone.

TFSA or RRSP - Selection Process

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.