Investment professionals in Canada know that a TFSA is one of the most powerful tools at their disposal.
If you haven’t opened yours yet, here’s why you should.
What is a TFSA?
A TFSA – or a Tax-Free Savings Account – is a special account for Canadians 18 or older that lets your money grow tax-free.
Unlike regular savings or investment accounts, where earnings are taxed, interest, dividends, or capital gains earned within a TFSA are generally tax-free, even when you take the money out.
What can you put in a TFSA?
TFSAs are incredibly versatile and are not just for holding cash. While you can keep cash in it, most people use their TFSA to grow their money tax-free by investing it.
They can hold stocks, ETFs, mutual funds, bonds, and GICs, giving you plenty of ways to grow your money faster without paying taxes on your gains.
How much can you contribute?
TFSAs are unique because your contribution room starts adding up from the year you turn 18, even if you haven’t opened up an account yet.
Each year, the government sets a new TFSA contribution limit, which can increase or decrease depending on inflation and is rounded to the nearest $500.
If you don’t use your full limit in a given year, any unused room carries forward indefinitely. This allows you the flexibility to contribute what you want, when you want.
You can have multiple TFSAs at different banks or on different investment platforms, however, your total contribution limit applies across all accounts.
So, before you go on a TFSA investing spree, make sure to keep an eye out on how much you’ve contributed.
If you over-contribute, you’ll be hit with a one per cent penalty per month on that extra amount – until that excess amount is removed from your account.
Withdrawals?
So, what happens when you need to withdraw money? With a TFSA, you can take your money out anytime, tax-free and penalty-free. Even better, any amount you withdraw is added back to your contribution room the following year.
Examples
Here are a few examples of how a TFSA can be beneficial to you.
Let’s say you turned 18 in 2022, and now it’s 2025, but you haven’t contributed to a TFSA yet.
As of 2025, your total available contribution room would be $26,500.
If you decide to invest $500, you’d still have $26,000 left to contribute.
Now, let’s say that $500 investment grows to $1,000. If you sell it and withdraw the full amount, the proceeds will be tax-free, and you’ll have an extra $1,000 in your personal bank account.
Even better, the following year, you can recontribute that $1,000 back into your TFSA, on top of the new annual contribution limit.
And that’s exactly what makes TFSAs so powerful – it gives you the flexibility to use your money freely, while letting it grow free of tax.
Whether you’re saving for a short-term goal, building an emergency fund, or investing for the future, a TFSA gives you the flexibility to grow your money on your own terms.
