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Tax Free Savings Account

Grow Your Money Tax-Free

 

What is a TFSA?

A TFSA is a government registered account that provides tax benefits for saving money. That's great... but what kind of tax benefits are we talking about? Let's get into this!

I like to think of a TFSA as an umbrella that shields the growth portion of your money from tax (for more about growing your money, visit the "investing" page). What I mean by the growth portion of your money is any interest that you earn from investing your funds. You can have many different types of accounts under your TFSA such as a savings account, a term deposit (aka GIC), mutual fund, etc. You can also have multiple TFSAs across different financial institutions. If you do, however, it's really important to keep track of your accumulated contributions because there are limits, and exceeding those limits results in penalties. More on this below.

So, let's look at an example. Say you've invested your money, and you're making a great return. If this investment is not under that TFSA umbrella, the amount by which your money "grew" is going to be added to your income, and you will be taxed on it (YUCK). Investing under your TFSA, however, means that you will not be taxed on any interest earned on your investment. Basically, if you're investing money you should be investing under a registered account.

Contribution Limits

As mentioned earlier, there are limits to how much you can contribute to your TFSA. These limits are unique to each individual and depend on a few factors:


Annual Dollar Limit
Every year the government announces the new annual dollar limit that you can contribute to your TFSA. So if an individual has maxed out their TFSA today, they need to wait until the government announces the new annual limit next year before they can contribute again without penalty. See the table below to see a history of the annual dollar limit since the inception of the TFSA program in 2009.

Year                                 Annual Dollar 
                                               Limit

2009 - 2012 - - - - - - - $5,000

2013 - 2014 - - - - - - - $5,500
2015 - - - - - - - - - - - - $10,000

2016 - 2018 - - - - - - - $ $5,500
2019 - 2021 - - - - - - - $6,000

Your Age
Your age affects your TFSA in two way: Firstly, in order to actually open up a TFSA you need to sign a contract, and in order to sign a contract you need to be of legal age in the province that you reside in. 

The second way that your age affects how much you can contribute is that as soon as you turn 18 you will start accumulating contribution room, even if you do not have a TFSA. Remember how we talked about the annual TFSA dollar limit? At the age of 18, this annual dollar limit comes into effect and you 
will start accumulating room. If you don't use the limit, it will carry over to the next year.

Withdrawals Made in Previous Years
Any withdrawals made from your TFSA can be re-contributed the following year. 

So, using these three factors, you can calculate your contribution room:

TFSA dollar limit of current year + any unused TFSA contribution limit from previous years + any withdrawals made from TFSA in the previous year.  


Let's say you turned 18 in 2019 and have never contributed to your TFSA: 
Today - in 2021 - you would be able to contribute: $6,000 (current annual $$ limit) + $12,000 (unused contribution room 2019 limit + 2020 limit) + 0 (previous years withdrawals) = $18,000
This calculation is purely for education purposes. The most reliable way to know your limit is to ask CRA!

Penalties For Overcontributing

As you will learn very quickly, in the adult-world there are penalties and fees for every mistake you make! The penalty for overcontributing to your TFSA is equal to 1% of the overcontributed amount for each month that the amount remains in your TFSA. So, make sure you don't overcontribute! Although, it is arguable that having that problem means you're winning somewhere! 

So, let's summarize!

What is a TFSA? A government vehicle that protects the money you make from interest from being taxed.
Who can contribute? You must be a resident of Canada and of legal age.
How much can you contribute? dollar limit of current year + Unused TFSA room from previous years + any withdrawal made in previous year. Remember though, the best way to know your specific 
room is to contact CRA
Why should you contribute? It literally saves you money!!