What is a TFSA and how does it work? (2024)

FAQs

What's the catch with a tax-free savings account? ›

If a non-qualified investment is acquired by a TFSA, you will be subject to penalty taxes, and the TFSA will have to pay tax on the investment income and capital gains earned on the non-qualified investment.

It is a way for individuals who are 18 years of age or older and who have a valid social insurance number (SIN) to set money aside tax-free throughout their lifetime. Contributions to a TFSA are not deductible for income tax purposes.

You can – and probably should – have both. Both a TFSA and a savings account have their purposes. Having both in your financial portfolio is a pretty good idea. One gives you savings freedom in the short term, the other gives you more potential for savings growth in the long term.

“Let's say you sell that stock and pull out the remaining cash from the sale from your TFSA. Not only have you locked in that loss, but you've lost that TFSA room too,” she said. “You won't be awarded more TFSA room because of your investment loss.”

Best TFSA GIC Rates Currently Available In Canada

Saven Financial – 5.30% (1-year) Peoples Bank of Canada – 5.10% (1-year) EQ Bank – 5.05% (1-year) Simplii Financial – 5.00% (1-year)

TFSAs can offer hassle-free withdrawals without immediate taxes, fees, or penalties, providing financial flexibility when needed. You can withdraw from your TFSA without losing contribution room, and recontribute withdrawn amounts in the following years.

Depending on the type of investment held in your TFSA, you can generally withdraw any amount from the TFSA at any time. Withdrawing funds from your TFSA does not reduce the total amount of contributions you have already made for the year.

A type of investment that is not intended to be allowed in a TFSA. The full details of what is prohibited are complex, but generally investments in a business where you own at least 10% of the business or investments where you are not at arm's length from the recipient of the investment are prohibited.

Holding cash in a TFSA

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.

The first four months of the year have been referred to as a 'danger zone' for those relying on TFSA contribution room data posted on their CRA account. If you've based your TFSA contributions on “My Account” information, be aware that it may not be accurate.

Is TFSA good for seniors? ›

Benefits for Seniors

The TFSA will also provide seniors with a tax-free savings vehicle to meet ongoing savings needs, something they have only limited access to once they reach age 71 and are required to begin drawing down their registered retirement savings.

Unlike RRSPs, TFSAs have no age limit for contributing and your plan never expires. It's there for life!

How does a TFSA work? One of the primary advantages of a TFSA is the ability to withdraw funds at any time without penalty. However, there are restrictions as to how much you can contribute annually.

What happens if I exceed the annual tax-free savings account limit? You will need to pay a penalty tax of 40% for contributions to your tax-free account that exceeds the limits.

How do TFSA contributions work? If you're asking “What's the catch?”—well, there isn't one, unless you count the yearly limit for the amount of money you can deposit into the TFSA. Each year, the federal government announces what the annual maximum contribution is; for 2022, it's $6,000, and for 2023, it's $6,500.

A TFSA allows you to set money aside in eligible investments and watch those savings grow tax-free throughout your lifetime. Interest, dividends, and capital gains earned in a TFSA are tax-free for life.