Unlock the Power of TFSAs: How to Save and Invest Tax-Free

Whether you want to build your emergency fund, buy a home, send your kids to college, take a once-in-a-lifetime vacation, retire comfortably, or establish financial security, a tax-free savings account (TFSA) can help you reach your savings goals. A TFSA is a Canadian government-registered savings plan that allows you to save a certain amount each year without owing taxes on your earnings—even when you withdraw them. By learning more about how TFSAs work, you can equip yourself to make the most of these powerful tools.

How to open a TFSA

Any Canadian resident who is at least 18 years old (or 19, in certain provinces and territories) and has a valid Social Insurance Number (SIN) is eligible for a TFSA. Some non-residents may qualify, too, though their savings may be subject to taxes.

You can open an account at a participating financial institution, like a bank, credit union, or insurance company. They may ask you for some identifying documents that prove your birthdate and SIN. If you’d like to manage your own portfolio, let the issuer know you’re interested in a self-directed TFSA.

Contributing to your TFSA

You can begin contributing to your TFSA as soon as you open the account. Remember that contributions aren’t tax-deductible, so they won’t help you minimize your income taxes. However, any money you earn through investing those contributions usually remains tax-free, even upon withdrawal.

The Canada Revenue Agency (CRA) sets annual TFSA contribution limits. In 2024, the limit was $7000. Since 2012, contribution limits have increased by $500 annually.

Your contribution room and contribution limit aren’t precisely the same. “Contribution room” refers to the maximum amount you can deposit into your TFSA during a given year, and it’s not always equal to the annual limit.

If you contribute less than the annual limit to your TFSA in a given year, the amount left over will be carried into your future contribution room. This mechanism offers you flexibility to save according to your current financial circumstances.

Likewise, if you withdraw money from your TFSA, that amount goes back into the following year’s contribution room.  So, if you withdrew $3000 in 2023, your 2024 contribution room would be $10,000.

Keeping track of your contribution room can be tricky. Fortunately, you don’t have to do it alone. You can contact the CRA over the phone, mobile app, or online to check your contribution room statement.

Making investments

TFSA investments can help your savings grow. If you have a managed TFSA, your financial institution will likely build your investment portfolio based on its assets. With a self-directed TFSA, you make final investment decisions. Eligible investments include:

• Mutual funds
• Cash
• Bonds
• Guaranteed investment certificates
• Shares of some small business corporations
• Securities from a designated stock exchange

Of course, all investments come with the risk of loss. Investment losses in your TFSA don’t count as withdrawals and, therefore, won’t go back into your contribution room.

Withdrawing TFSA funds

TFSAs offer a great deal of flexibility when it comes to withdrawals. Generally, you can take any amount of money out of your TFSA as needed. Withdrawals don’t count towards your taxable income.

Keep in mind that while withdrawals increase your contribution room for the following year, they don’t reduce the contributions you’ve made in the current year. If you try to replace the money you’ve taken out, you may exceed your contribution limit.

To break that down, say you contribute the full $6500 into your TFSA for 2023 and take out $2000. Your 2025 contribution room would be $6500, plus the $500 annual increase, plus the $2000 you withdrew, adding up to $9000. However, if you tried to replace the $2000 withdrawal in 2023, you would exceed your $6500 contribution limit.

If you’re ever unsure about your contribution room before or after a withdrawal, you can contact the CRA.

Flexible savings with TFSAs

Unlike many other government-registered savings plans, TFSAs can help you save for any reason. You can even open multiple TFSAs for different savings goals and manage each account differently. That flexibility makes TFSAs especially useful financial tools, whether you want to supplement your savings or begin building a stronger financial foundation for your family’s future.

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