A Tax Free Savings Account (TFSA) is a registered investment or savings account that allows for tax free gains. The amount of money that can be contributed to a TFSA is limited each year. Contributions are made with after-tax dollars, which means withdrawals and interest earned is tax free! A TFSA is perfect for any savings goal.
TFSAs were first introduced by the Canadian government in 2009. They were designed by the Canada Revenue Agency to function as a registered investment account that can hold mutual funds, ETFs, bonds or cash savings, allowing for income-tax free gains.
TFSA Rules you Need to Know
If you withdraw money from a TFSA, the amount you take out is added to how much you can contribute the following year. TFSA contribution room doesn’t disappear if you fail to contribute in any given year. It just rolls over into the next year so you’ll have an ever-expanding contribution limit.
Two things you need to know:
- Don’t over-contribute; if you do you’ll be assessed a 1% penalty on the excess contribution every month until it’s withdrawn.
- Understand TFSA contribution rules. If you hope to replace money you withdraw from your TFSA, you’ll have to wait until the year following your withdrawal to earn that contribution room back.
To find out your available TFSA contribution room: