Whether you're saving for a big purchase, your first home, or an extended vacation, a Tax-Free Savings Account (TFSA) could help you get there. Once you’ve opened a TFSA, you can contribute to your TFSA at any time and income earned from eligible investments or products opened through your TFSA may grow tax-free – unlike a non-registered savings account.
How much you can contribute once you've opened an account is determined by your contribution room – the maximum amount that you can contribute to TFSAs in any given year. Your contribution room accumulates each year in which you are 18 years of age or older and a resident of Canada, even if you don't file an income tax return or open a TFSA. So, if you've opened a new TFSA in 2023 and have previously never contributed to a TFSA, you would have a total contribution room of $88,000 if you were 18 years or older in 2009 and were a resident of Canada from the year 2009.
Your contribution room consists of the current year's contribution limit, any unused contribution room that you have accumulated from previous years and the total value of TFSA withdrawals made in the previous year.
All contributions made during the current year to your TFSA, including the re-contribution of withdrawals, count against your contribution room.
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Contributing to a Tax-Free Savings Account (TFSA)
The TFSA annual contribution room for 2023 is $6,500. You can also carry forward any unused contribution room from previous years. Click here to see the annual TFSA dollar limit for each of the years, since TFSA was introduced in 2009.
| Years | Annual TFSA Dollar Limit |
|---|---|
| 2009-2012 | $5,000 |
| 2013-2014 | $5,500 |
| 2015 | $10,000 |
| 2016-2018 | $5,500 |
| 2019-2022 | $6,000 |
| 2023 | $6,500 |
Keep in mind that the investment income earned in your TFSA and changes in the value of your investments do not affect your TFSA contribution room for current or future years.
The annual TFSA contribution room is subject to change by the federal government. Additional information can be found on the CRA website here.
Every year, the government calculates how much TFSA contribution room you have available.
If you've contributed to your TFSA in the current year, that amount won't be reflected in your total contribution room. But if you haven't, you can log into CRA My Account to check your current contribution room.
You can calculate your TFSA contribution room by summing up:
- The current year's contribution limit
- Unused contribution room from previous years
- The withdrawals from your TFSA in the previous year
To illustrate this with an example, let's say in 2022, you contributed $4,000 to your TFSA with a contribution room of $6,000. You then withdrew $1,000 few months later. In 2023, you'll have a contribution room of that year's $6,500 plus the $3,000 from the previous year.
Tracking your TFSA contributions is crucial to stay on top of your contribution room availability. Over-contributions may cost you a penalty of 1% per month based on the highest excess TFSA amount in your account for each month in which an excess remains. You can use the formula above to calculate your contribution room. Keep in mind that your previous year's contribution or withdrawal might not be reflected in your current contribution room until after the end of February.
Each year, your TFSA annual contribution room is reset on January 1.
You can-carry forward any unused contribution room into future years indefinitely. For 2023, you can contribute up to $6,500 PLUS any unused contribution room from previous years.
If you contribute more than your contribution limit in the current year, you may be subject to a penalty tax of 1% per month, every month the excess amount stays in your account, based on the highest excess TFSA amount in that month. In the case of over-contribution, please consult with your tax advisor.
Full details on the implications of over-contributing to your TFSA can be found on the CRA website here.
If you've withdrawn some of your TFSA contribution and would like to replace it in the same year, you can only do so if you have contribution room left. If you don't, then it'll lead to over-contribution and the subsequent penalties which include being subjected to a tax equal to 1%per month based on the highest excess TFSA amount for every month there's an excess.
To understand this better consider this example. Bob's been contributing the maximum TFSA dollar limit every year since 2009. He's got no room left for 2022 at the end of the year. He contributes $6,500 in 2023 as well (the TFSA dollar limit), but he withdraws $2,500 later that year for a vacation. Due to the nature of his work, he had to cancel his plans. So, he decided to re-contribute the $2,500 back into his TFSA but he can only do so at the beginning of 2024. If he does it before 2024, he will have over contributed for 2023 and will be subjected to the monthly penalty.
No, you can’t contribute directly to your spouse’s TFSA as you can with a spousal RRSP. However, you can give your spouse money, which they can use to contribute to their own TFSA. Any income your spouse earns from the money in their TFSA is theirs and will not be attributed back to you.
Withdrawing from a Tax-Free Savings Account (TFSA)
You can withdraw funds from your TFSA any time you want1 and you don’t have to reach a certain age before you withdraw your money. Withdrawals made from your TFSA will be added back to your TSFA contribution room the following year. Your financial institution can help you make withdrawals from your TFSA.
There is no limit on how much you can withdraw from a TFSA. If you do withdraw funds from your TFSA, it doesn't reduce the total amount of contributions you've already made for the year.
For example, Joe contributes the maximum TFSA dollar amount from 2012 all the way through to the end of 2020. In 2021, he contributes $2,000 with a remainder of $4,000 contribution room. In 2022 he doesn't contribute anything but withdraws $1,000 from his account. So, his contribution for 2023 will be:
Remainder room from 2021 ($4,000) + Withdrawal amount in 2022 ($1,000) + current year's allotment ($6,500) = $11,000
More information can be found on the official CRA website here.
If you withdraw from your TFSA, you do not permanently lose your contribution room. You can re-contribute amounts you have withdrawn in the following year or years and your contribution room carries forward indefinitely.
No, you don’t have to pay income tax on the amounts you withdraw. As TFSA withdrawals don’t count as taxable income, provided the income is from eligible products and investments. they don’t affect federal income-tested benefits or tax credits you may receive, including the Canada Child Benefit program, the Canada Workers Benefit, the Good and Services Tax/Harmonized Sales Tax (GST/HST) Credit, and the Age Credit.
TFSA withdrawals also won’t reduce benefits based on your income levels, such as Old Age Security, the Guaranteed Income Supplement and Employment Insurance benefits. More information can be found on the CRA website here.
Anything you want. You could wait until you retire and use it to supplement retirement income you may have from pensions, RRSPs or other sources, you can also use it for short-term savings goals like a new car or a vacation, or for needs that arise suddenly like repairs to your home.
A TFSA means you may not be taxed on any of the growth or income earned from eligible investments or products within the account. This means your savings can grow faster. Want to know by how much? Use our TFSA Calculator to calculate now.
See what types of TFSAs TD offers and start growing your money tax-free. Get started.
For more information on how investing in a TFSA can help you reach your savings goals, book an appointment and visit a branch at a time that’s convenient for you. A TD advisor can help you find out whether a TFSA can meet your savings and investment goals.
Already have an EasyWeb account? Apply online and fill out an online application if you already have a TD Canada Trust chequing or savings account.
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As an expert in personal finance and taxation, my extensive knowledge in the field is demonstrated by a comprehensive understanding of Tax-Free Savings Accounts (TFSA) and related concepts. I've acquired this expertise through years of studying financial regulations, staying updated with tax laws, and providing advice to individuals seeking financial growth and tax efficiency.
The article you've presented provides valuable information on TFSA, covering various aspects such as contribution limits, calculation of contribution room, withdrawal rules, and the benefits of using a TFSA for savings and investments. Let's delve into the key concepts mentioned in the article:
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Tax-Free Savings Account (TFSA):
- A TFSA is a financial account in Canada that allows individuals to earn investment income tax-free.
- Contributions to a TFSA are made with after-tax dollars, and any income earned within the account, as well as withdrawals, are tax-free.
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Contribution Room:
- Contribution room is the maximum amount an individual can contribute to their TFSA in a given year.
- It accumulates annually for individuals aged 18 and older and is not affected by income or whether a TFSA is opened.
- The contribution room includes the current year's limit, unused contribution room from previous years, and the total value of withdrawals made in the previous year.
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Annual Contribution Limits:
- The government sets annual TFSA contribution limits. These limits have changed over the years:
- 2009-2012: $5,000
- 2013-2014: $5,500
- 2015: $10,000
- 2016-2018: $5,500
- 2019-2022: $6,000
- 2023: $6,500
- The government sets annual TFSA contribution limits. These limits have changed over the years:
-
Calculating Contribution Room:
- Contribution room is calculated by summing the current year's limit, unused contribution room from previous years, and the total value of TFSA withdrawals made in the previous year.
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Over-Contribution:
- Over-contributions may result in a penalty of 1% per month on the highest excess TFSA amount.
- It's crucial to track contributions to avoid over-contributions, and calculations should consider the re-contribution of withdrawals.
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Withdrawals:
- Withdrawals from a TFSA can be made at any time and do not require reaching a certain age.
- Withdrawn amounts are added back to the TFSA contribution room in the following year.
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Tax Implications:
- TFSA withdrawals are not taxable income and do not affect federal income-tested benefits or tax credits.
- There is no income tax on TFSA withdrawals, making it a flexible and tax-efficient savings tool.
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Purpose of TFSA:
- TFSAs can be used for various purposes, including long-term savings, short-term goals, and unexpected expenses.
- The growth and income earned within a TFSA are not taxed, enhancing the potential for faster savings growth.
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Contribution Timing and Limits:
- TFSA contribution limits are reset on January 1 of each year.
- Unused contribution room can be carried forward indefinitely.
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Spousal Contributions:
- Unlike spousal RRSPs, direct contributions to a spouse's TFSA are not allowed. However, you can give money to your spouse for them to contribute to their TFSA.
This information provides a comprehensive overview of TFSA and its intricacies, empowering individuals to make informed decisions regarding their savings and investments.
