Tax-Free Savings Account (TFSA)
Easy, flexible investing for your future
What is a TFSA?
Like the RRSP, the TFSA is a registered account designed to help Canadians invest for the future. While TFSAs are very useful for building wealth towards retirement, the rules for these accounts are different than those for RRSPs. These differences can make TFSAs very useful for short- and long-term spending goals such as family vacations, purchasing a new car or home renovations.
How it works
Contributions – Canadians 18 and older can contribute annually to their TFSA. The contribution limit is set annually and is $5,500 for 2017. The limit increases periodically, based on inflation and rounded to the nearest $500. Unlike RRSP contributions, TFSA contributions are not deductible for income tax purposes. But any investment income earned within a TFSA is tax free. As with RRSPs, unused contribution amounts can be carried forward to future years.
Withdrawals – You can withdraw any amount from a TFSA at any time without paying tax. You can also put that money back into your TFSA, although you must wait until the next calendar year to avoid penalties.
Where should I invest?
Each of the account types below has a role to play in helping you meet your short- and long-term financial goals. Which one you choose depends on your circumstances.
|What is the account for?||General savings, retirement savings, home purchase, continuing education||Retirement savings, home purchase, continuing education||General savings|
|How much can I contribute?||Up to $5,500 per year in 2017||Up to 18% of the income you earned in the previous year (up to a maximum of $26,010 in 2017)||No limit|
|Can I delay contributions until a later date?||Yes. Unused contribution room can be carried forward.||Yes. Unused contribution room can be carried forward.||There is no contribution limit.|
|Can I deduct contributions from my income tax?||No||Yes. An RRSP contribution can reduce the income tax you pay.||No|
|What can I invest in?||A wide range of investments.||A wide range of investments.||Your financial institution pays interest on the money in your account – currently at historically low rates.|
|Will my investments be taxed as they grow?||No||No||Yes|
|Will I be taxed when I withdraw money?||No||Yes, on both your original contributions and the money you’ve earned. However, by the time you withdraw money from your RRSP, your income may be lower, so you'll be taxed at a lower rate.||No|
|Can I re-contribute amounts that I withdraw?||Yes, withdrawn amounts can be contributed in future years.||Yes, if you have available contribution room in the year you wish to re-contribute.||Yes|
|At what age can I start saving?||18||Any age||Any age|
|When do I have to cash out?||No requirement||In general, your RRSP must be converted to a Registered Retirement Income Fund (RRIF), annuity or other income option at age 71, and you must make minimum taxable withdrawals. You can also simply de-register your RRSP savings, although this may result in unwanted tax consequences.||No requirement|
|Will cashing out affect any of my government benefits?||No, because TFSA withdrawals don’t count as income.||Maybe, because RRSP withdrawals count as income. The extra income could reduce the amount you get from some “income-tested” benefits.||No, because withdrawals don’t count as income.|