What is a Tax Free Savings Account (TFSA)?

Saving for life’s goals rarely looks the same for everyone. Whether you’re building an emergency fund, planning a major purchase, or investing for the future, having the right account can make a meaningful difference. 

A Tax-Free Savings Account (TFSA) offers flexibility that many Canadians value, allowing you to save and invest in a way that adapts as your priorities change. It can be used on its own or alongside other registered accounts, making it a useful tool at many stages of life. 

In this blog, we’ll explain what a TFSA is, how contributions and withdrawals work, and how Mainstreet and Aviso Wealth Advisors can help you use your TFSA as part of a broader financial plan. 

What is a TFSA?

A Tax Free Savings Account (TFSA) is a registered account that allows Canadians to earn investment income without paying tax on the growth or withdrawals. Once opened, your TFSA can be used throughout your lifetime, starting at age 18. All income earned inside a TFSA is tax-free, meaning interest, dividends, and capital gains do not need to be reported on your tax return. This makes a TFSA a valuable tool for building savings and investing over time. 

When you open a TFSA, you can choose from a variety of investment options, depending on your goals, timeline, and comfort with risk. These may include: 

• Cash 
• Stocks 
• Bonds 
• Mutual Funds 
• Exchange-traded funds (ETFs) 
• Term Deposits / Guaranteed Investment Certificates (GICs) 

At Mainstreet, our Advisors will work with you to understand your financial goals, timelines and risk tolerance to ensure you have the right investments within your TFSA.  

Who Can Contribute?

To open and contribute to a TFSA, you need to meet a few simple requirements: 

• Be a Canadian resident 
• Be at least 18 years old 
• Have a social insurance number (SIN) 

If you meet these requirements, you are eligible to open and contribute to a TFSA. Opening a TFSA is one of the simplest ways to start saving and investing while benefiting from tax-free growth. If you’re ready to open a TFSA, our Mainstreet and Aviso Wealth Advisors can provide personalized advice and guidance so you can invest with confidence.

TFSA Contributions

When you open a TFSA, you receive contribution room, often referred to as your TFSA limit, that determines how much you can add to your account. This includes your annual contribution room and your lifetime contribution room. It’s important to keep track of your available room to help you make the most of your TFSA and avoid overcontributing and incurring penalties.

Annual Contribution Limit

Your annual contribution limit is the maximum you can add to your TFSA each year. The Canadian Government sets the contribution amount each year, eligible Canadian residents aged over 18. The following amounts show how much TFSA contribution room was added each year. 

Any unused contribution room will carry over into future years, so it isn’t lost if you don’t use it right away. You can also try our TFSA calculator to see how much tax-free growth you could earn over time. 

Lifetime Contribution Limit

Your lifetime TFSA contribution room grows each year, starting in the year you turn 18. For example: 

• If you were 18 years old or older in 2009, your total contribution room would be $109,000 
• If you turned 18 in 2024, your total contribution room to date would be $14,000 

Even if you didn’t open a TFSA when you turned 18, your contribution room starts accumulating from that year. You can check your available TFSA contribution room by logging in to your Canada Revenue Agency (CRA) account. If you contribute more than your available room, a 1% tax applies each month on the highest excess amount.  

Withdrawing From a TFSA

One of the benefits of a TFSA is that you can withdraw funds at any time, for any purpose, tax-free! Whether you’re planning a vacation, covering an emergency, or working toward a big purchase, a TFSA gives you flexibility to support your changing needs. 

When you withdraw money from your TFSA, the amount you originally contributed is added back to your available contribution room the following calendar year, in addition to your new annual TFSA contribution room. This means you can keep using your TFSA to reach your goals without losing valuable space. 

Any investment growth earned inside your TFSA does not create additional contribution room while it remains in the account. However, if you withdraw funds, the entire amount you withdraw, including any growth, is added back to your available contribution room on January 1 of the following year, along with your new annual limit. For example, if you contributed $5,500 and your investment grew to $6,000, withdrawing the full amount would restore $6,000 of contribution room the next year. not just your original contribution. 

The same concept applies if an investment loses value. If you contributed $5,500 and the value of your investment later dropped to $4,000, withdrawing the full amount would only restore $4,000 of contribution room the following year. The $1,500 loss is not recovered through the contribution room.

Estate Planning with a TFSA

For estate planning purposes, you can name your spouse or common-law partner as a successor holder. This allows them to take over your TFSA after your death without affecting their own TFSA contribution room.  

You also have the option to name a beneficiary, who will receive the money from your TFSA if you pass away. In this case, the account does not continue as a TFSA and may no longer benefit from tax-free benefits. 

Making these decisions is an important part of planning for the future. Understanding your options is key to ensuring your TFSA aligns with your overall estate plan, and our advisors are here to support you every step of the way. 

Can I Only Use it for Retirement savings?

No, a TFSA isn’t limited to retirement savings. You can use it to save for almost any financial goal. Unlike a Registered Retirement Savings Plan (RRSP), First Home Savings Account (FHSA) or a Registered Education Savings Plan (RESP), there are no restrictions on how the funds are used and no required timelines for withdrawals.  

A TFSA is a great supplementary account if one of those registered accounts is already fully used. Its flexibility makes it one of the best ways to build wealth over time or reach your financial goals. 

Our advisors will work with you to ensure your TFSA and other investment accounts align with your needs, timeline and goals. They will take the time to get to know you and provide you with high-quality financial advice so you can reach your financial goals.

Who can Benefit from a TFSA?

While most people can benefit from a TFSA, some groups may find it especially useful depending on their financial situation and goals. 

Benefits for Seniors

Unlike an RRSP or a Registered Retirement Income Fund (RRIF), you can keep contributing money to a TFSA after age 71. Since taxes can be a significant expense in retirement, transferring funds from an RRSP, RRIF or non-registered investments into a TFSA can help reduce taxes and grow your savings tax-free.  

Our Mainstreet and Aviso Wealth Advisors will work with you to optimize your savings and retirement strategy to ensure it works for you. So, you can have flexible solutions and live the life you want in retirement.

Benefits for Low-Income Earners

For some low-income earners, a TFSA may be a better option than an RRSP or FHSA. This is because a low-income earner might not benefit as much from the tax deduction of an RRSP or FHSA. In addition, withdrawals from an RRSP are added to your annual taxable income and could affect your eligibility for certain government benefits. Withdrawals from a TFSA are not considered taxable income and generally do not affect benefits like the Guaranteed Income Supplement (GIS) or Old Age Security(OAS).

Ready to get started?

A TFSA is one of the most versatile ways to save and invest for your future. Whether you’re planning for a big purchase, retirement or simply want to grow your money tax-free, a TFSA can help you reach your goals. 

If you’re ready to open a TFSA or transfer your existing account, Mainstreet Credit Union makes it simple. Book an appointment with a Mainstreet and Aviso Wealth Advisor, and you’ll receive high-quality personalized advice tailored to your needs to help you make the most of your savings.

Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes, and it is not intended to provide specific advice including, without limitation, investment, financial, tax, or similar matters.