A tax-free savings account (TFSA) is a great tool for hitting your savings goals. But are you making the most of yours? Read on to make sure you’re not making these common mistakes.
The federal government introduced the tax-free savings account (TFSA) in 2009. And it’s been gaining popularity ever since. According to Statistics Canada, 16 million Canadians opened at least one TFSA by the end of 2020.
It’s easy to see why. TFSAs are super flexible. You can contribute any time, to a yearly maximum. And withdraw funds whenever you need them (keep in mind, there are re-contribution rules). Best of all, any investment you hold inside your TFSA grows tax-free.
You can use your TFSA to help pay for a new home. Or even your children’s education, a dream project, or retirement. And you’re not taxed when you take the money out, either.
How much can you contribute to your TFSA?
For 2024, you can contribute up to$7,000 to your TFSA. And you can carry forward unused contribution room from previous years.
Do you have more questions about TFSA contributions? Find answers on ourTFSA page.
Despite the versatility of TFSAs, there are some potential slip-ups to watch out for. Here are four you should consider.
1. Contributing over your TFSA limit
It’s possible to go over your TFSA contribution limit without knowing it. This happens when you withdraw and deposit money in the same year.
It’s important to remember that on January 1, you gain two things. The first is more contribution room. The second is you also get back the room from withdrawals you made in the prior year.
The penalty? The Canada Revenue Agency (CRA) charges 1% per month for any amount over your total TFSA limit until you take it out.
2. Holding cash in a TFSA
Sure, they have the words “savings accounts” in their title. But TFSAs have little in common with everyday chequing and savings accounts. That means one thing: they’re no place for cash.
If you’re only using your TFSA to hold cash, you could be missing out on tax savings that come from investments that grow in value over time tax-free. Instead, talk to an advisor about other higher return investments that you can hold in your TFSA.
3. Withdrawing cash to set up a new TFSA
If you’re changing financial institutions, it’s a good idea to pay particular attention to your TFSA. Why? Because moving cash from an existing TFSA to a new one could affect your contribution room. If you make a withdrawal, you can’t recontribute until the following January 1.
Let’s say you withdraw all the funds from your TFSA. Then you set up a new TFSA somewhere else and deposit this money into it. That entire deposit would count as a new contribution for the year. And it could trigger an over-contribution penalty.
The solution? See if your new financial institution can make a direct transfer on your behalf.
4. Not opening a TFSA at all
It’s still a common myth you may have heard. You’ve lost out on years of contribution room if you didn’t open a TFSA in 2009. Actually, what you’ve missed out on is the investment growth you could have realized. You haven’t lost any contribution room.
Even if you haven't opened a TFSA yet, your contribution limit has been growing. The bottom line? TFSAs offer tax-free growth and the ability to access your cash at any time. That of course is subject to the terms of the investments in your TFSA. This could include restrictions on withdrawals or guarantees that could be affected by a withdrawal. TFSAs make a great companion to other investment tools, like RRSPs.
Want to make sure you’re maximizing your TFSA?
Read more
- How to fix a TFSA or an RRSP over-contribution
- 6 really useful things you can do with your TFSA
This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.
FAQs
Here are five mistakes to avoid when managing your TFSA.
- Overcontributing to your account. ...
- Naming spouse a beneficiary instead of successor holder. ...
- Holding investments that produce foreign income. ...
- Not recognizing how market gains and losses impact your future contribution room. ...
- Choosing non-qualified investments.
What is the best strategy for TFSA? ›
A key strategy is to contribute early, so your investments have more time to grow. Make sure you're consistently contributing to your TFSA by enabling automated deposits into your account. This will keep your TFSA growing in a tax-free environment. Remember to ensure that you stay within your contribution room.
How are people using their TFSA wrong? ›
The most common TFSA mistake
If cash makes up the majority of the money you have in your TFSA, you aren't doing it right. But don't worry! You're not alone in making this mistake. Despite its name, a TFSA is not meant to function as a traditional savings account.
How to use TFSA properly? ›
Here are eight tips on getting the most out of your TFSA:
- INVEST INSIDE YOUR TFSA. ...
- CONTRIBUTE REGULARLY. ...
- USE YOUR TFSA FOR LONG-TERM GOALS. ...
- DON'T WITHDRAW FUNDS UNNECESSARILY. ...
- AVOID OVERCONTRIBUTING. ...
- CONSIDER USING YOUR TFSA TO HOLD HIGH-GROWTH ASSETS. ...
- GIVE MONEY TO YOUR SPOUSE TO INVEST IN A TFSA.
What is the best ETF for TFSA 2024? ›
Best ETF for TFSA
If you are looking to invest your ETF into a TFSA, one of the best options for that is iShares S&P/TSX Capped Info Tech ETF (TSE: XIT). This is because a TFSA is tax-free, giving investors more of an incentive to go with a more aggressive investment.
What is the downfall of a TFSA? ›
Holding a volatile investment in a TFSA can be risky for a couple of reasons: First, if a capital loss is realized, that loss cannot be used to reduce other taxable capital gains you may have. Second, only the amount withdrawn can be added back to TFSA contribution limit the following year.
What are the best stocks to hold in a TFSA? ›
- Utilities. Utility stocks are often considered a safe and reliable option for long-term investors. ...
- Retail. Retail stocks can also be a great option for investors looking for exposure to a sector that is both essential and resilient. ...
- Banks. ...
- Software.
What is best to hold in TFSA? ›
That means the TFSA best investments include cash, mutual funds, publicly traded stocks, GICs and bonds. As mentioned, contributions are not tax deductible, as they are with an RRSP. However, withdrawals from a TFSA are not taxed.
What is the biggest benefit of TFSA? ›
One of the major advantages of a TFSA is that you can make withdrawals as you see fit, with no penalty. You are also free to reinvest those withdrawals in a later year. All eligible investors are restricted to the same annual contribution amount: it is not determined by your income.
What is the downside of a TFSA? ›
No Income-Tax Reduction:
Unfortunately, TFSA contributions can't be used to lower your taxable income. This means there is no way to decrease your income tax when contributing to a TFSA. For high income earners this makes an RRSP more appealing.
Yes, you can lose money on a TFSA, but it is easy to avoid losing your money. Typically, people who lose their money on a Tax-Free Savings Account are people who are using it for more volatile investments or people who are over-contributing.
Should I hold dividend stocks in TFSA? ›
It's essential to buy high-quality dividend stocks for your TFSA. When it comes to investing your hard-earned money for the long run and taking advantage of the power of compounding, two of the most important factors are the time you give your money to grow and the amount of money you have invested.
What is the danger zone for TFSA? ›
One financial planner calls the first four months of the year a “danger zone” for making deposits to tax-free savings accounts. During this period, Canada Revenue Agency info that shows TFSA contribution room for the current calendar year can be based on incomplete information.
How does a TFSA work for dummies? ›
A Tax-Free Savings Account (TFSA) is a registered tax-advantaged savings account that can help you earn money, tax-free. You can think of a TFSA like a basket, where you can hold qualified investments, that may generate interest, capital gains, and dividends, tax-free.
What is the strategy for TFSA? ›
Keep the following points in mind: Avoid Over-Contributing: Over-contributions to TFSAs are subject to a 1% penalty tax per month. If you over-contribute, withdraw the excess amount right away. Do Not Withdraw: While TFSA withdrawals are tax-free, it's important to only withdraw when necessary or for emergencies.
How can a TFSA lose money? ›
Yes, you can lose money on a TFSA, but it is easy to avoid losing your money. Typically, people who lose their money on a Tax-Free Savings Account are people who are using it for more volatile investments or people who are over-contributing.
What is not allowed in TFSA? ›
The holder of a TFSA cannot carry on a business in his or her TFSA (e.g. a business actively trading securities or running a marijuana store) without facing adverse tax consequences. TFSAs are not allowed to own certain "non-qualified" or "prohibited" investments.