Your Step-By-Step Guide to Opening a Tax-Free Savings Account

Saving for a home down payment, a car, or a long-term goal like retirement? Open a TFSA for tax-free earnings and withdrawals.

What is a TFSA?

A Tax-Free Savings Account (TFSA) comes in three forms: deposit accounts, annuity contracts (like a segregated fund), and arrangements in trust. They are available from insurance companies, banks, credit unions, and trust companies. The TFSA itself is not an investment – it’s an account offered by your financial services provider.

What’s the difference between an RRSP and a TFSA?

Registered Retirement Savings Plans (RRSP) provide Canadians a way to save for retirement, without having to pay income tax on the money they deposit. TFSAs were introduced in 2009 to provide another way to save money in a tax-efficient manner. While RRSP contributions are tax-deductible, TFSA contributions are not. The reverse is true of withdrawals – money is taxed when you take it out of an RRSP, but not out of a TFSA.

Who is eligible for a TFSA?

Canadian residents, age 18 or older, with a valid social insurance number.

If you live in British Columbia, New Brunswick, Newfoundland and Labrador, the Northwest Territories, Nova Scotia, Nunavut, or the Yukon, the minimum age for entering into a contract in those provinces and territories is 19.

How does a TFSA work?

Deposits into your TFSA are invested for you, into stocks, bonds, mutual funds, and other qualified investments. You get to choose where your money goes. It’s also up to you when you withdraw your money from the account. You can take out whatever amount you like, whenever you like, without having to pay tax on the withdrawal.

It’s up to you what kind of TFSA you purchase and how your money is invested. Only you can make contributions to or withdrawals from your TFSA. But you can do so anytime. Like RRSPs, there is a maximum amount you can deposit into a TFSA each year.

The 2023 limit is $6,500, up from $6,000 the year before. If you don’t save that much, you can carry your remaining contribution room forward into the next year. If you have recently come into money – through an inheritance, the sale of your home, or otherwise – you can contribute up to $88,000 in 2023. How much you contribute really comes down to how much you’ve carried forward from previous years.

Canadians who have to wait until they’re 19 to open a TFSA will see the contribution room they would have earned at 18 brought forward automatically.

How do I open a TFSA?

Because there are different types of TFSAs, you’re not limited to one account at a time. (Having more than one does not change your contribution limit, however.) Contact your financial services provider, and give them your social insurance number and date of birth. Have proof of both handy in case you’re asked.

Some financial institutions will let you open an account online, however you will still require the identifying information you would need to provide in person.

What investment options are available for TFSAs?

There are multiple investments available to TFSA holders. They range from conservative options like cash, term deposits, and guaranteed investment securities, to government and corporate bonds, mutual funds and individual stocks, and exchange-traded funds.

Deciding which are right for you depends on two things, mostly.

First, what’s your risk tolerance? In other words, are you likely to lose sleep if your investments perform poorly over relatively short periods of time? If you worry about money a lot, it is perfectly reasonable to invest more conservatively (even if it will likely mean you earn less in the long term).

Second, what’s your timeline? If you’re saving for a purchase you have to make in the short term – perhaps a car or a trip – then you’re probably better served by more conservative investments that aren’t likely to fall sharply in value. If you don’t need to access your money for a number of years – say you’re saving for retirement, 20 years down the road – then you can be more aggressive. Short-term losses probably won’t matter to you because there is plenty of time for your investments to make up for them.

What are the advantages and disadvantages of a TFSA?

While Canadians see real value in TFSAs, it is telling that the most common complaint about them is that the annual contribution limit is too low. Still, there are a couple of disadvantages that should be on your radar:

• You can lose money in a TFSA. Depending on the investments you select, it’s possible to see your account balance go down.
• While you can transfer investments from an RRSP to a TFSA, this will count as an RRSP withdrawal for income tax purposes.
• If you withdraw money from your TFSA, that does not change the contribution room you have available that year. (It does in the following year, however.)

The advantages of saving money in a TFSA – in addition to those described above – are numerous:

• You can transfer assets from one TFSA to another without it being taxed as a withdrawal.
• You can give money to your spouse or common-law partner to save in their TFSA. This will not count against your contribution room.
• You don’t have to live in Canada to open a TFSA.

One more important point: You can earn income in your TFSA, and even withdraw funds, and still qualify for federal income-tested benefits and credits such as Old Age Security, the Guaranteed Income Supplement, Employment Insurance, the Canada child benefit, Canada workers benefit, and goods and services tax/harmonized sales tax credit. TFSA withdrawals have no effect on your access to these programs.

The TFSA is a versatile, well-designed option for Canadians who want to save money in a tax-efficient manner. Either as a complement to RRSP savings, or on its own, a TFSA is worth considering.

Also worth considering: the insurance version of a TFSA is called a Guaranteed Interest Annuity. Learn more about annuities, or speak to a Serenia Life advisor to learn more. Fill out this form to get started.

FAQs

How do I open a TFSA?

Contact whichever financial institution you choose. That can be an insurance company, bank, credit union or trust company. They’ll ask for your social insurance number and date of birth.

Can I use a TFSA to save for a house or car?

Yes. You can spend the money saved in a TFSA on whatever you like. They’re ideal for major short- to mid-term purchases.

Can I open more than one TFSA?

Yes. You can open as many as you like. But it won’t change your annual TFSA contribution limit.

Can I open a TFSA for my spouse or kids?

No. TFSAs cannot be opened for others.

Is there such a thing as a joint TFSA?

No. TFSAs must be individually owned. And they cannot be transferred to another person.

What happens if I go over my TFSA contribution limit?

You will be taxed on whatever amount of money you have in your TFSA that’s over your limit for that year. The charge is 1% of that amount, monthly. So, if you’re $100 over, you’ll be taxed $1 per month for as long as you’re over the limit.

Is there a deadline for TFSA contributions, like there is with RRSP contributions?

No. Contributions aren’t tax-deductible, so you can make them at any time without it affecting your annual tax filing.

How do I report a TFSA on my tax return?

You don’t. Contributions aren’t tax-deductible, and withdrawals aren’t taxed. Not even the interest you earn on money in your TFSA is taxed.