The Tax-Free Savings Account (TFSA) is a registered savings plan that became available to Canadian residents, who are at least 18 years old, starting in 2009. One of the key benefits of a TFSA is the flexibility it provides. You can contribute money to a TFSA at any time, but if you contribute more than your available TFSA contribution room, you may pay a penalty tax on any excess contributions while they are in the plan.
The TFSA dollar limit gets set every year. The following table provides an annual breakdown of the TFSA dollar limits.
Annual TFSA dollar limits
You can carry forward any unused TFSA contribution room indefinitely. So, if you’ve never had a TFSA, have been at least 18 and a Canadian resident since 2009, you can contribute up to $88,000 in 2023 because of the unused contribution room you’ve carried forward.
Here are my top 3 reasons why almost every Canadian resident should consider a TFSA.
1. TFSAs really are tax-free
Although you contribute to a TFSA with after-tax dollars, once the funds have been contributed, they grow tax-free as long as funds remain in the plan. In other words, if you follow the rules, all income and gains — whether realized or unrealized — will never be taxed while in the plan, and the funds in the TFSA may be withdrawn tax-free at any time, for any reason.
In addition, because TFSA withdrawals aren’t considered income, they don’t reduce federal income-tested benefits and credits, such as the Guaranteed Income Supplement, Old Age Security pension payments or the age credit.
In fact, even upon death, you will pay no tax on a TFSA. And if you designate a successor holder — limited to your spouse or common-law partner — or beneficiary for your TFSA, the assets can be distributed to the successor holder or beneficiary without probate, which could mean potential savings on provincial or territorial estate-administration taxes.
2. Once you're 18, contributions can be made to a TFSA at any age
To contribute to a Registered Retirement Savings Plan (RRSP), you must be 71 years of age or younger at the end of the year and must have unused RRSP contribution room from earned income, which includes employment and rental income. You may also contribute to an RRSP for your spouse or common-law partner who isn’t more than 71 years of age at the end of the year, to the extent that you have unused RRSP contribution room. Contrast that with the TFSA, for which there’s no upper age limit and no earned-income requirement.
One popular strategy has emerged for seniors who are required to withdraw a prescribed minimum amount annually from their Registered Retirement Income Fund (RRIF) plans starting in the year after the RRIF is established. Amounts that you withdraw from an RRIF that aren’t needed to fund your living expenses may be contributed to a TFSA — if you have sufficient contribution room — for tax-free retirement accumulation.
3. Amounts withdrawn from a TFSA can be recontributed in the following year
TFSAs offer flexibility because amounts withdrawn from a TFSA, other than amounts withdrawn to correct over-contributions, will be added to your contribution room in the following calendar year, so you can recontribute the withdrawn amounts.
In contrast, you can only contribute to an RRSP if you have RRSP contribution room, which is based on earned income and isn't reinstated after withdrawals. There are exceptions for amounts withdrawn under the Home Buyers’ Plan to buy a first home or the Lifelong Learning Plan to fund post-secondary education, provided you follow certain repayment rules.