UPDATED FOR 2023
When it comes to creating a long-term savings plan, Canadians have a couple of different options. Tax-free savings accounts (TFSAs) are an excellent option for those wanting to get a head start on their savings, regardless of age.
Incorporating a TFSA into your savings plan is a great way to build a savings base with the added benefit of flexibility and tax-free deposits and withdrawals. In this blog, we’ll highlight everything you need to know about TFSAs, including:
- The purpose of a TFSA
- The benefits of a TFSA
- Who can open one
- What kind of investments or assets your TFSA can hold
- When you should open a TFSA
- How much money you should contribute per year
To learn more about the benefits of a TFSA, keep on reading!
What is a Tax-Free Savings Account?
A tax-free savings account (TFSA) is a Canadian savings account where contributions, interest earned, dividends, and capital gains aren’t taxed and can be withdrawn at any time.
The TFSA program began in 2009 to create a tax-sheltered account with more withdrawal flexibility, as opposed to your standard RRSP, which we’ve already covered here. Individuals 18 years of age or older and with a valid social insurance number (SIN) can easily set up and contribute to a TFSA through their financial institution.
What are the benefits of a TFSA?
Opening a TFSA can help you achieve your long-term saving goals while maintaining a high level of flexibility in your savings. We understand that long-term savings are ideal, but sometimes things come up, and you’ll need to dip into your savings. This is easily done through a TFSA with minimal drawbacks.
Flexibility when it comes to your savings
Through a TFSA, you can save both for the long-term and short-term. Whether you’re saving long-term for retirement, or short-term for an upcoming vacation, contributing to your TFSA means you can withdraw your funds at your convenience.
When investing through your TFSA, you don’t have to worry about paying taxes on investment income earned. Another bonus is that you can withdraw your contributions as you please without being taxed.
Ideal for retirement planning
Similar to an RRSP, your TFSA is an excellent option for retirement planning and can be used in conjunction with your existing RRSP. For example, if you’ve used your maximum RRSP contributions for the year, you can still contribute to your TFSA to maximize your yearly investments.
Who can open a TFSA?
TFSAs are available for all Canadians 18 years of age and older, including those who are self-employed. Unlike RRSPs, individuals can continue contributing to their TFSA throughout their lifetime, making it a great investment companion to your RRSP.
What investments can my TFSA hold?
TFSAs are sometimes confused with savings accounts, but TFSAs can hold various investments, including:
- ETFs, like the Evermore Retirement ETFs.
- Guaranteed Investment Certificates (GICs)
- Mutual funds
- Stocks and bonds
Depending on your goals, you may choose to incorporate a variety of the above investments and assets into your TFSA. For short-term needs, cash and GICs may be suitable options, but for the long-term retirement portion of the TFSA it is important to choose an investment best suited for that goal.
When should I open a TFSA, and how much can I invest per year?
TFSAs are available to Canadians 18 years of age and older and can be opened through your current financial institution. Though TFSAs have a lower maximum contribution than an RRSP, you can still utilize your contribution maximum for the year. For instance, the annual TFSA dollar limit for 2023 is $6,500. This is a $500 increase over the 2022 limit of $6,000.
What’s the next step?
So, you’ve got the basics down regarding your TFSA, but now what? We understand that saving and investing your money - whether for something big or small - is an evolving journey that is bound to change over time.
Interested in getting granular with your TFSA? We’re here to help with our RRSP vs. TFSA eGuide. You’ll learn more about the key similarities and differences between RRSPs and TFSAs, how to maximize your contributions, and some tips and tricks to investing over time. Download your copy of our eGuide here.