How the Tax-Free Savings Account Works
- A limit of one TFSA per person. Similar to RRSPs, this account is reported to the Canada Revenue Agency.
- Contributions to a TFSA will not be deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.
- Unused TFSA contribution room can be carried forward to future years.
- You can withdraw funds from the TFSA at any time for any purpose.
- The amount withdrawn can be put back in the TFSA at a later date (not within the same calendar year) without reducing your contribution room.
- Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.
- Contributions to a spouse’s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.
How Is a TFSA Different From a Registered Retirement Savings Plan?
- An RRSP is primarily intended for retirement. The TFSA is like an RRSP for everything else in your life .
- Both plans offer tax advantages, but they have key differences.
- Contributions to an RRSP are deductible and reduce your income for tax purposes. In contrast, your TFSA savings will not be deductible.
- Withdrawals from an RRSP are added to your income and taxed at current rates. Your TFSA withdrawals and growth within your account will not—they will be tax-free.
- Those who cannot contribute $5,000 in a given year will be able to carry forward their unused contribution room to future years.
- In addition, Canadians may want to use their savings—to buy a new car or a cottage, or start a small business—and the full amount of withdrawals can be put back into the TFSA in the future.
- Couples often save and plan together, so Canadians can contribute to their spouse’s or common-law partner’s TFSA, depending on the spouse’s or partner’s available room.