What is a TFSA (Tax Free Savings Account)?

A TFSA is a type of account that encourages Canadians who’re 18 or older (who hold a valid social insurance number) to save money and earn interest tax-free. Ideal as a short-term savings strategy, TFSAs are more flexible than other savings programs because they allow you to withdraw money from the account when you need it and repay it when you’re able to. The best part is, the contributions you make and any income that you earn in the account (from say, investments) are exempt from tax even when you withdraw it.

Note: It’s important to remember that the amounts you contribute to your TFSA and any related administrative costs aren’t tax deductible for income tax purposes.

 

How much can I contribute to my TFSA?

Each year, the amount you’re allowed to contribute to your TFSA is determined by your TFSA contribution room which is, in turn, made up of the following:

  • Your TFSA dollar limit
  • Any unused TFSA contribution room from previous years and
  • Any withdrawals made from your TFSA in the previous year

Since the program began in 2009, the annual TFSA dollar limits have been as follows:

  • 2009 to 2012: $5,000
  • 2013 and 2014: $5,500
  • 2015: $10,000
  • 2016: $5,500
  • 2017: $5,500

Haven’t opened a TFSA yet? Don’t worry, you haven’t missed out. If unused, your contribution room accumulates each year; as of 2016, the cumulative total is $46,500.

Before you open your TFSA and start making contributions, it’s recommended that you first determine your contribution room; any contributions that exceed your allowable contribution amount will be subject to a tax. Having said that, you can determine your contribution room by logging in to the Canada Revenue Agency (CRA) My Account (registration required), or by calling the CRA at 1-800-267-6999.

 

Can I contribute to my spouse or common-law partner’s TFSA?

While you aren’t allowed to contribute to your spouse or common-law partner’s TFSA, you can give them money to contribute to their own account without reducing your own contribution.

 

What happens when I withdraw money from my TFSA?

If you withdraw money from your TFSA, you can replace it in the same year as long as you still have contribution room available for the year. If you don’t, the withdrawn amount will be added to your TFSA contribution room at the beginning of the following year.

 

Can the funds in my TFSA be invested?

You bet! Much like a registered retirement savings plan (RRSP), your TFSA contributions can be invested. The following is a list of investment types that are permitted to be held within your TFSA:

  • Cash
  • Mutual funds
  • Securities listed on a designated stock exchange
  • Guaranteed investment certificates (GICs)
  • Bonds
  • Certain shares of small business corporations

For more information on the types of investments permitted within your TFSA, refer to the CRA website.