Tax-free savings account (TFSA)—the facts

MK2221E - TFSA: The facts

Whether you’re saving for the short term or long term, a tax-free savings account (TFSA) can be a valuable addition to your financial plan. It can be a powerful tool for saving money in a tax‑free environment.

What’s a TFSA?

A tax-free savings account is a flexible, general-purpose savings account that you can make contributions to each year and withdraw funds at any time in the future. A TFSA gives you a powerful incentive to save by allowing investment growth to accumulate and be withdrawn tax free.

You can open a TFSA at most financial institutions and can invest in a wide range of qualified investments: stocks, bonds, mutual funds, segregated fund contracts, guaranteed investment certificates (GICs), and more.

How much can you contribute to a TFSA?

The current annual contribution limit is $7,000 per calendar year. However, the total cumulative amount is based on contribution limits that were a bit lower in previous years, as this table shows:

Year Annual limit Cumulative total
2009–2012 $5,000 $20,000
2013–2014 $5,500 $31,000
2015 $10,000 $41,000
2016–2018 $5,500 $57,500
2019–2022 $6,000 $81,500
2023 $6,500 $88,000
2024 $7,000 $95,000

Increases, rounded to the nearest $500, are applied as warranted by the Consumer Price Index to help account for inflation.

If you don’t contribute the full amount to your tax-free savings account, the unused amount carries forward to the next year—unused contribution room can be carried forward indefinitely.

Can I withdraw money from my TFSA?

You can withdraw from your tax-free savings account at any time. If you withdraw money from your account, the amount of your withdrawal will be added to your TFSA contribution room the next calendar year. You can’t contribute more than your TFSA contribution room in a given year, even if you make withdrawals from the account during the year.

What if I contribute too much money to a TFSA?

A tax penalty of 1% per month can be applied to the highest single amount that’s over the contribution limit anytime during the month. There are two circumstances when this could occur:

  • if you put more money into your TFSA than the contribution limit allows
  • if you withdraw an amount from your TFSA and recontribute it before the next year and don’t have the necessary room to make the contribution

In both situations, the penalty applies each month the excess amount stays in the account. You can withdraw the excess amount to prevent having to pay the penalty tax for the remaining months of the year.

Can I claim a tax deduction on TFSA contributions?

Unlike a registered retirement savings plan (RRSP), you can’t claim a tax deduction for contributions you make to a TFSA. Likewise, TFSA administration fees can’t be claimed as a tax deduction.

Should I open a TFSA?

Canadians have multiple savings options that serve various purposes and can help you reach your goals. Tax-free savings accounts can be a great way to save money, but make sure you consider why you’d use them and how you can best benefit from them. It all depends on your situation and goals.

This guide describes the details of TFSAs and offers tips on how to maximize the tax-free investing strategy available with these plans. You’ll find information you need to help you decide if a TFSA is the right choice for you.

Advisors, share this guide with your clients to help answer any questions they may have about TFSAs and to support them in achieving their savings goals.

This communication is published by Manulife Investment Management.  Any commentaries and information contained in this communication are provided as a general source of information only and should not be considered personal investment, tax, accounting or legal advice and should not be relied upon in that regard. Professional advisors should be consulted prior to acting based on the information contained in this communication to ensure that any action taken with respect to this information is appropriate to their specific situation. Facts and data provided by Manulife Investment Management and other sources are believed to be reliable as at the date of publication.

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Tax, Retirement & Estate Planning Services Team

Tax, Retirement & Estate Planning Services Team

Manulife Investment Management

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