TFSA vs Savings Account: Which One Should You Choose?

As a Canadian, there are plenty of banking and investment accounts that you can sign up for, from as simple as a basic savings account to the Tax-Free Savings Account (TFSA). Each option comes with its own perks and drawbacks, so it’s important to weigh the two to make the right choice based on your financial goals, investment strategy, and tax considerations. 

In this article, we’ll compare both accounts to help you determine which account suits you best.

Key Points

• A TFSA is a registered investment account where the earnings are not taxed, offering tax-free growth on your contributions and investments.
• A savings account is a regular bank account that earns interest on the balance and offers easy access to funds.
• A TFSA is suitable for tax-free growth and long-term savings, while a savings account may be best for short-term goals and quick access.

TFSA Vs Savings Account

While they are similar in certain ways, TFSAs and savings accounts can affect your finances differently, so make sure to do your research before opening either one.   Here are the main differences between a TFSA account and a savings account.

What Is A TFSA?

Introduced by the Government of Canada in 2009, a TFSA is a registered savings account where you can store and earn interest without paying tax on it. In it, you can hold eligible investments that may generate capital gains, interest, and dividends (tax-free) to reach your savings goals more efficiently.

Features Of A TFSA

Before opening a TFSA, it’s important to understand its features and how it can benefit you. 

Contribution Limits

The Canada Revenue Agency (CRA) sets limits on how much money you can contribute to a TFSA each year. The annual contribution limit for 2025 is $7,000 (and up to $102,000 cumulative limit depending on your age or when you became a Canadian resident). You can carry forward any unused contribution room, which allows you to catch up on contributions in the future. 

Interest Gained Is Not Taxable

One of the best aspects of a TFSA is that you don’t have to pay taxes on any gains you make on the money or investments inside it, whether from interest, dividends, or capital gains. This makes it a great tool to use for long-term savings.

Withdrawal Flexibility

TFSAs are great because you’re allowed to withdraw money from them tax-free too, which can leave you more funds for larger costs. Plus, any money you withdraw from it can be re-contributed in the following or subsequent years, with no impact on your contribution room for those years.  

Variety Of Investment Options

You can invest your money in a number of qualified investments in a TFSA, each of which may have different benefits and drawbacks based on your savings goals. Qualified investments include:

• Cash
• Guaranteed-Income Certificates (GICs)
• Mutual Funds
• Exchange-Traded Funds (ETFs)
• Stocks
• Bonds

Learn more: TFSA Contributions: How to Invest For Beginners

What Is A Savings Account?

Savings accounts are available with almost every financial institution. They allow you to store your money and earn interest on funds you save. Most savings accounts are insured by the Canada Deposit Insurance Corporation (CDIC) or provincial deposit insurance for credit unions.

Features Of A Savings Account

Like a TFSA, it’s important to understand the features of a savings account to see if it is right for your savings goal.

Interest Income

Any interest your money generates will grow your savings account over time. Normally, your financial institution will calculate the interest daily and pay it into your account monthly. However, interest rates on savings accounts are typically lower compared to certain TFSA investment accounts. 

Interest Earned Is Taxable

While TFSAs allow you to grow your money without being taxed on your earnings, the interest earned in a savings account is taxable and therefore must be reported on your income tax return.

Minimum Threshold

Some savings accounts will feature a minimum balance threshold that you must stay above to earn interest on your funds. A lot of banks will also waive your monthly account fees when you maintain a specific balance.    

No Contribution Limits

Unlike TFSAs, savings accounts allow you to deposit as much as you like, with no limits on contributions. However, CDIC insurance only covers eligible deposits separately up to $100,000.

Limited Transactions

Although most savings accounts are free, many charge service fees if you go over a certain number of transactions per month. Luckily, many online banks now offer free savings accounts with unlimited transactions.

How To Open A TFSA vs Savings Account

TFSAs and savings accounts are both very easy to open and are widely available. All you have to do is find a financial institution whose offer matches your needs. Don’t forget to do some research and weigh your options carefully before making your choice.

How To Open A TFSA

To open a TFSA, follow these steps:

Step 1: Determine Your Eligibility

You must be a Canadian resident and at least the age of majority in your province to open a TFSA. 

Step 2: Choose A Financial Institution

TFSAs can be opened at several financial institutions, including banks, credit unions, and brokerages. Do some research to find a provider that offers what you’re looking for in a TFSA.

Step 3: Fill Out An Application

You’ll need to complete an application to open a TFSA. As part of the application process, you’ll need to provide your personal information and identification documents, such as a driver’s license and Social Insurance Number (SIN).  

Step 4: Make A Deposit Into Your Account 

You can contribute to your TFSA once it’s been set up. Be sure to stay within your annual contribution limit and cumulative contribution limit ($102,000). 

Step 5: Choose Your Investments

You may have various investment options to choose from, including savings accounts, mutual funds, GICs, stocks, and bonds, among others. Choose the ones that most closely align with your financial goals and appetite for risk.

Learn more: Best TFSA Accounts In Canada

How To Open A Savings Account

To open a savings account, follow these steps:

Step 1: Choose A Financial Institution

Compare different banks and credit unions to find one that offers the best interest rates and lowest fees on savings accounts.

Step 2: Decide On The Type of Savings Account To Open

Financial institutions typically offer a variety of savings accounts, such as high-interest savings accounts and joint accounts. Choose the one that you’re looking for. 

Step 3: Complete The Application

Fill out the application, and be sure to complete the personal information forms and provide the required documentation.

Although the requirements depend on your financial institution and personal situation, you must present at least one of these government documents to apply for a savings account in Canada (unless you’re a minor accompanied by a parent or guardian):

• Canadian driver’s license
• Canadian passport
• Canadian birth certificate
• Social Insurance Number (SIN)
• Health insurance card that qualifies as ID (under provincial or territorial law)

If you’re a newcomer to Canada, you may also need to provide additional documentation, such as the following:

• A document or card with your photo and signature, issued by select authorities
• Permanent Resident (PR) card or Immigration, Refugees, and Citizenship Canada (IRCC) form
• Certificate of:
  • Indian Status
  • Canadian Citizenship
  • Certificate of Naturalization

Step 4: Fund Your Account

Once your account is ready, you’ll need to fund it. Banks may have minimum deposit requirements, so check with your financial institution to see what that threshold may be. You can add money to your account via cash deposit, cheque, or e-transfer from another account.

Learn more: Best Saving Accounts In Canada

TFSA vs Savings Account: Which One Should I Choose?

Research is key when choosing a bank account. Don’t hesitate to compare multiple TFSA vs savings account providers and ask them any questions you have, because both accounts have benefits and drawbacks that could affect your finances.    

Choose A TFSA If:

• You Have Long-Term Savings Goals – Even though the funds in a TFSA aren’t locked in, it’s a better idea to keep them saved for as long as possible. This can help you make the best returns on your investments.
• You Want More Investment Variety – You can use a TFSA to buy almost any investment product with less risk and more liquidity, as is the case with GICs. Stocks and ETFs are longer-term investments with higher risk but better returns.
• You Want To Maximize Tax-Free Returns – Since you don’t have to pay tax on the funds in a TFSA, you might be able to maximize your profits (within your risk tolerance) and benefit from compounding non-taxable returns in the long term. The tax-free growth of a TFSA is particularly attractive to those in higher tax brackets who want to reduce the tax effect on their savings and investments.

Choose A Savings Account If:

• You Have Short-Term Savings Goals – Savings accounts usually make more sense for short-term goals because they’re easy to access and often have a low taxable interest.
• You Need An Emergency Fund – A savings account is also a good option for emergency costs, like medical bills, loss of employment, or home repairs. Most people will save at least 3 to 6 months of emergency funds in a savings account.
• You Want Immediate Access To Money – If you prefer not to worry about contribution room or the potential for a greater loss of gains on your investments, a savings account is the way to go because of how easy it is to withdraw money from one.

Additional Reading

What To Do When You Over-Contribute To Your TFSA?

How To Budget And Build Savings As A PNP Express Immigrant

Average Savings By Age In Canada

Final Thoughts

Whether you’re looking to build an emergency fund, pay down bills, or make long-term investments, there are various types of bank account options available, including TFSAs and savings accounts. Savings accounts are great if you have simple financial goals and want easy access to your funds. On the other hand, TFSAs may be great if you have more long-term financial aspirations and want to be more aggressive with your investment earnings without being subject to taxation.

TFSA vs Savings Account FAQs