Learn About The Best TFSAs in Canada

Find out about tax-free savings accounts and learn whether they're right for you.

Tax-free saving accounts (TFSAs)

A TFSA is a tax-free savings account, but it’s not like your typical savings account. A TFSA can hold different investments such as GICs, stocks, bonds and even cash deposits. All of these investments are sheltered from taxes when they’re a part of your TFSA, allowing you to grow your savings faster.

If you are over 18 years of age and hold a valid social insurance Number (SIN), you’re eligible to open a TFSA.

A TFSA has the following features:

  • Tax-free withdrawals: Don’t pay any taxes on your withdrawals
  • Tax-free growth: You don’t pay taxes on any interest or capital gains earned by investments within your TFSA
  • Limited contributions: Contribution room increases each year; for 2020 you can contribute up to $6,000, but unused contribution room rolls over. If you have never contributed to a TFSA, you can deposit up to $69,500 (as of 2020).

Which investment options can I hold in my TFSA?

You can use your TFSA to hold a variety of different investments. Your choice of investment depends on your personal preference and financial goals.

The most common investment options that fall under a TFSA are:

  • Cash (savings and GICs)
  • Mutual funds
  • Government and corporate stocks/bonds
  • Exchange-traded Funds (ETFs)

How do I choose the best TFSA investment option?

A TFSA is a flexible savings vehicle. While best suited for longer-term investments, a TFSA can help you save for short, medium- or long-term goals such as, buying a new car, home renovations or a dream trip. This is because, unlike a RRSP, there is no penalty to withdraw from a TFSA at any time. When choosing to invest within a TFSA there are several investment options, each with its own set of features. These investment options include medium-to-high risk investments like stocks and corporate bonds and low-risk investments like GICs (guaranteed investment certificates) and government bonds.

Here are the factors you should be looking at when choosing a TFSA investment option:

  • Risk capacity: The investment type you choose to put under your TFSA greatly depends on your capacity to handle risk. Investment risk is the potential loss of investment or investment earnings. Your risk capacity depends on your income, personal assets, age and financial goals. If you have a steady income and fixed personal assets, you can probably afford to invest in high-risk TFSA investments like stocks and mutual funds. If not, you can start off with safer options like a GIC or a savings deposit. Government bonds are also a safer option when compared to corporate bonds.
  • Investment duration: Every investment under your TFSA has its own maturation period. If you have a short-term goal, you may want to invest in a high-interest, short-term investment option such as cash savings, stocks or a GIC (guaranteed investment certificate). You also have the ability to use your TFSA to supplement your RRSP (registered retirement savings plan), if you have maxed out on your RRSP contribution. This can be in the form of a long-term GIC (7-10 years) or a government bond.

Frequently asked questions about TFSAs

What is the maximum TFSA contribution limit?

The maximum contribution for a TFSA can change annually. The current contribution limit is $6,000 per year (as of 2020), but unused contribution room rolls over. This means, if you have never contributed to a Tax-Free Savings Account, you can deposit up to $69,500 (this is the total of the maximum contribution limit for each year since 2009, when the first TFSA was introduced).

What will happen if I over contribute to my TFSA?

If you over contribute to your TFSA, the Canada Revenue Agency (CRA) will impose a tax of 1% per month, for each month or period that the excess contribution remains in the account. The 1% tax will continue to apply until you withdraw the excess amount, or it is absorbed by any available contribution room you may have.

For more information, please check the Government of Canada website.

What are the TFSA withdrawal rules?

You are allowed to withdraw money from your TFSA at any time. However, specific product restrictions may apply to your investment (e.g. GIC maturity dates). Whatever amount you withdraw can be put back in your TFSA starting the following year without impacting your overall contribution room.

Can I use my TFSA assets as security for a loan?

You can use your TFSA assets as collateral for a loan. If you’re interested in getting a loan for a home renovation or major purchase, a TFSA may help you out. Banks are not required to accept your TFSA as collateral for a loan, but sometimes they may. But remember if you go this route, you can't withdraw funds from your TFSA until your loan has been paid off.

Ready to start contributing to your TFSA? Compare the best Canadian tax-free savings accounts to see which one suits your financial needs and savings goals.

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