Tax Free Savings Account (TFSA)
Saving just got a whole lot easier
Tax-Free Savings Account (TFSA) is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs.
A Tax-Free Savings Account (TFSA), is an account where you can save or invest up to $5,500 a year.1 Unlike other types of savings, you’re not taxed on the income you earn. It’s a great way to save for your short or long-term goals; because it lets your savings grow – tax-free.
The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).
How the Tax-Free Savings Account Works
- Canadian residents age 18 or older can contribute up to $5,500 annually to a TFSA.
- Investment income earned in a TFSA is tax-free.
- Withdrawals from a TFSA are tax-free.
- Unused TFSA contribution room is carried forward and accumulates in future years.
- Full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
- Choose from a wide range of investment options
- Contributions are not tax-deductible.
- Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
- Funds can be given to a spouse or common-law partner for them to invest in their TFSA.
- TFSA assets can generally be transferred to a spouse or common-law partner upon death.
The difference between TFSAs and RSPs
|Primary purpose||Saving for any purpose||Retirement savings, home purchase or education.|
|Annual contribution limit||$5,5001 PLUS amounts withdrawn in previous years2||18% of previous year’s earned income (maximum limits apply), less pension adjustments|
|Unused contribution room||Carried forward||Carried forward|
|Withdrawals||You’re not taxed on withdrawals.
They do not affect federal income-tested government benefits such as Old Age Security
|Money taken out is taxed as income at your marginal rate.
Withdrawals are counted as income and may affect federal income-tested government benefits such as Old Age Security
|Withdrawn amounts||Added to contribution room in future years||Contribution room is lost for amounts you withdraw|
|Plan maturity||None; no upper age limit on contributions||End of year when you turn 71|
|Spousal plan||n/a||You can contribute directly to a spousal RSP|
1 Annual contribution limit for 2016 is $5,500. Annual contribution limit from 2009 to 2012 was $5,000. Annual contribution limit from 2013 to 2014 was $5,500. Annual contribution limit for 2015 was $10,000. Annual TFSA contribution limit subject to change by the federal government.
2 The amount you withdraw can be re-contributed to your TFSA the following year or years without impacting your contribution room.