Tax Free Savings Account (TFSA)
Save Money Tax-Free for Short-Term or Retirement Purpose
The Tax-Free Savings Account (TFSA) is a powerful and flexible savings tool introduced in 2009 to help Canadians save money without having to pay taxes on their contributions or earnings. Anyone who is 18 years or older with a valid social insurance number can open and contribute to a TFSA. While contributions to a TFSA are not tax-deductible, any income earned within the account, such as interest, dividends, or capital gains, is completely tax-free—both while it’s in the account and when withdrawn. Whether you’re saving for a home, a vacation, retirement, or simply building an emergency fund, the TFSA offers unmatched flexibility and tax savings. The ability to withdraw funds at any time, without penalty, makes it an ideal choice for both short-term and long-term financial planning. The amount you can contribute depends on your previous years’ income, but the ideal contribution amount should be based on your current year’s income to help reduce your Marginal Tax Rate (MTR) and utilize any unused contribution room for the next year. RRSPs are an effective tool for maximizing retirement savings and minimizing taxes.
TFSA Contribution Room
TFSA contribution room is the maximum amount you can contribute to your TFSA each year. It starts accumulating from the year you turn 18 and become a Canadian resident. Even if you don’t open a TFSA or file a tax return, you’ll still accumulate contribution room annually.
Here’s a summary of the annual TFSA limits over the years:
- 2013-2014: $5,500
- 2015: $10,000
- 2016-2018: $5,500
- 2019-2022: $6,000
- 2023: $6,500
- 2024-2025: $7,000
For example, someone who has never contributed to a TFSA and was born in 1991 or earlier could have cumulative contribution room of $102,000 as of Jan 1, 2025.
Impact on Your Government Benefits and Credits
One of the major benefits of a TFSA is that the income earned or withdrawn from the account does not affect your eligibility for government benefits and credits. This includes federal income-tested benefits such as Old Age Security (OAS), the Guaranteed Income Supplement (GIS), and Employment Insurance (EI) benefits.
Similarly, the income from your TFSA or any withdrawals will not impact your eligibility for federal credits like the Canada Child Benefit (CCB), the Working Income Tax Benefit (WITB), the Goods and Services Tax/Harmonized Sales Tax (GST/HST) credit, or the Age Amount.
You can withdraw money from your TFSA at any time without tax consequences, and it will not affect your eligibility for these benefits and credits.