The Tax-Free Savings Account (TFSA) provides Canadians with a unique way to save and invest, with significant tax perks that can help grow wealth over time. Implemented in 2009, the TFSA has become an increasingly popular choice for saving toward short-term financial goals, retirement, or simply as a way to build wealth.
Let’s go deeper into TFSAs, including how they work, their benefits and potential drawbacks.
Key Points You Should Know About A TFSA
| TFSA Stand For | Tax-Free Savings Accounts |
| What is it? | A TFSA is a registered investment account that allows you to earn interest, tax-free. |
| Contribution Limits | $7,000 annually for 2025 ($102,000 lifetime limit) |
| Withdrawal | – Tax free withdrawals – Withdrawals can be re-contributed |
What Is A Tax-Free Savings Account (TFSA)?
A TFSA is a registered investment account that allows Canadians to earn investment income, tax-free. TFSA contributions are made with net income, so there are no tax deductions for contributions. Income earned within a TFSA is not subject to tax, even when withdrawn.
How Does A TFSA Work?
A TFSA works as follows:
- Open A TFSA Account: You can open a TFSA with most financial institutions, including banks, credit unions, investment firms, and brokerages.
- Contribute To Your Account: Deposit funds into your TFSA up to your available contribution limit for the year.
- Choose Your Investment Vehicle: Pick the investments that align with your financial goals and appetite for risk. TFSAs can hold several investment products in various combinations. Eligible investments include:
- Cash
- Stocks
- Bonds
- Mutual funds
- GICs
- ETFs
- Options
- Precious Metals
- Grow And Withdraw Your Money Tax-Free: Your investments grow tax-free in your TFSA. You can also withdraw the money whenever you need it, without paying taxes.
Learn more: 2025 TFSA Contributions: How to Invest For Beginners
Contribution Limits
Every year, the Canadian government sets a contribution limit for TFSAs. In 2025, for instance, the annual contribution limit is $7,000. Unused contribution room can be carried forward, which allows for plenty of contribution room over time.
Annual TFSA contribution limits can change each year based on inflation adjustments. Over the years since the program was introduced, the TFSA contribution limit has increased, as indicated on the following chart:
| Year | Contribution Limit |
| 2025 | $7,000 |
| 2024 | $7,000 |
| 2023 | $6,500 |
| 2022 | $6,000 |
| 2021 | $6,000 |
| 2020 | $6,000 |
Learn more: What Is The TFSA Contribution Limit For 2025?
TFSA Cumulative Contribution Room
As mentioned, you can carry over the unused contribution room if you don’t use it. For instance, if you never contributed to a TFSA since its introduction in 2009, your cumulative contribution room as of 2025 would total $102,000 (when you add the total contribution limits from the above chart).
How To Find Out How Much Contribution Room You Have
There are several ways to verify your TFSA contribution room:
- Use your CRA My Account for Individuals
- Use the MyCRA mobile app
- Use the CRA’s Represent a Client service, which permits an authorized representative to access your tax information.
- Call Tax Information Phone Service (TIPS) at 1-800-267-6999
How To Open A TFSA
You can open a TFSA in the following ways:
Through Your Bank
A common way to open a TFSA is through a financial institution. Many people favour opening a TFSA with their bank, as it’s easier to deal with an organization you’re already familiar with.
You can meet with an advisor to discuss your investment goals and get a recommendation for an investment portfolio suitable for you. Once you’ve settled on which investments you’d like, they’ll open your TFSA, and you can begin contributing funds to the account.
Through A Traditional Brokerage
Another way to open a TFSA is through a brokerage, which will allow you to create and run a customized investment portfolio unique to your needs and goals.
With An Online Brokerage
If you’re more of a hands-on investor and feel confident making investment decisions on your own, a self-directed TFSA may be a good option. An online broker will supply you with various tools to help you manage your investments and execute transactions. Robo-advisors like Questwealth or Wealthsimple offer automated investing services and TFSA accounts.
Learn More: Best TFSA Accounts In Canada
TFSA Withdrawal Rules
There are no limits on how much you can withdraw from your TFSA, though any amount you pull out can only be re-contributed the following year if you choose to do so. Any losses realized on investments within the account aren’t considered withdrawals.
For example, let’s say you invest $3,000 in various stocks near the beginning of the year, which you hold in your TFSA. By the end of the year, the stocks’ market value declined, and they’re now worth only $1,000. You proceed to withdraw the remaining $1,000 to cut your losses.
In this case, the $2,000 loss you incurred on your stock investments wouldn’t be recognized as a withdrawal and won’t affect your unused TFSA contribution room. Only the $1,000 you took out (the actual withdrawal amount) would be considered a withdrawal and would increase the contribution room in the next year.
TFSAs Vs. RRSPs
Whether to invest in a TFSA or an RRSP depends on your financial situation and goals. Here’s a brief comparison of the two accounts:
| TFSA | RRSP | |
| Tax Deductible | Contributions are not tax-deductible | Contributions are deductible |
| Taxation | Tax-free growth and withdrawals | -Tax-deferred growth -Taxed withdrawals |
| Contribution Limits | -Yearly limit set by the government -Unused room carries forward | -18% of income earned (up to $32,490) -Unused room carries forward |
| Withdrawals | Withdrawals can be re-contributed | Withdrawals cannot be re-contributed |
| Best For | -Short-& long-term savings -Flexible withdrawals | -Retirement savings -Those seeking tax deductions |
Benefits Of TFSAs
There are several perks that TFSAs offer:
Tax-Free Growth
The main benefit of a TFSA is its tax-free growth. Unlike taxable accounts where investment earnings are taxed, the income in your TFSA is not taxed. This can result in significant long-term growth.
Flexibility
TFSAs are very flexible, in that withdrawals can be made at any time without penalty. Plus, amounts withdrawn can be re-contributed in subsequent years. This makes TFSAs a great option if you have either short- or long-term savings goals.
No Effect On Government Benefits
TFSA withdrawals don’t affect your eligibility for federal income benefits, like OAS and GIS. You can use your TFSA to supplement your income in retirement without the risk of having your benefits reduced.
Various Investment Options
TFSAs allow for a wide range of investment options, including savings accounts, stocks, bonds, mutual funds, and exchange-traded funds (ETFs). This allows you to customize your investment portfolio according to your goals and risk tolerance.
Drawbacks Of TFSAs
While TFSAs offer many benefits, there are some potential drawbacks to consider:
Limits On Contributions
Higher-income earners or those looking for big investments might not find TFSA contribution limits enough for their financial goals.
Penalties For Over-Contribution
If you over-contribute to your TFSA, you may face penalties. The Canada Revenue Agency (CRA) charges 1% per month on any excess amount until it’s withdrawn. That’s why it’s important to keep track of your contribution room to avoid such penalties.
Learn more: What To Do When You Over-Contribute To Your TFSA
Investment Losses
Like other investments, there’s a risk of loss. You cannot use any losses incurred in your TFSA to offset other taxable income, unlike taxable accounts that allow you to deduct losses.
How To Maximize Your TFSA
To make the most of your TFSA, consider the following tips:
Start Early
Like any other saving strategy, the earlier you start, the better. This will give you more time for your money to grow tax-free.
Maximize Annual Contributions
If you’re financially able to, consider contributing the maximum amount every year to take advantage of as much tax-free growth as possible.
Pick The Right Investment
Choose investment vehicles that are best suited to your financial goals and risk tolerance. You may also want to pick a handful of investments to diversify your portfolio.
Re-Contribute Withdrawn Amounts
If you withdraw from your TFSA, consider re-contributing that money in the future. This ensures that you maximize your contribution room and potential for tax-free growth.
Keep Tabs On Your Account
Review your TFSA on a regular basis and make changes as needed. This includes your contribution room and your investment performance.
Final Thoughts
The TFSA is a convenient and flexible financial tool for Canadians looking to save and invest their money tax-free. You can use the funds for things like saving for a home, retirement, or an emergency fund, among other things. Be sure to understand the rules and strategies to use your TFSA to your advantage and maximize your earning potential.
