I put together this millennial’s guide to the TFSA—aka the Tax Free Savings Account—to help out every friend who has messaged me, slightly embarrassed, to admit that while they might have a TFSA, they were murky on the details of how it really worked, and how to use it best. This guide will cover the basics of the account, and go over how you can use it (and OK, some advice on how you maybe should be using it too).
Because even if they did teach this in school (I feel like they might have?) let’s all just freely admit that we had bigger things on our mind back then, and tackle learning this stuff now when we actually have money to put in one.
Here are the fast facts you need to know about your TFSA, whether you have one yet or you don’t.
What is a TFSA?
The Tax-Free Savings Account (TFSA) is a tax-advantaged account available to Canadian residents over the age of 18. You contribute to the account with after-tax dollars, and any growth within the account is tax-free when you withdraw it.
Basically, if you want to get some tax benefits without really having to deal with the tax system? This is the account for you, my friend.
There are three main things you need to know about a TFSA: how to contribute to the account, how to have the account, and how to withdraw from the account.
Contributing to a TFSA
- The TFSA comes with a contribution limit. For the 2019 calendar year, you can stash $6,000 in a TFSA.
- Your contribution room accumulates every year, so if you don’t have $6,000 lying around? Don’t worry. This year’s contribution room will be there whenever you’re ready to use it in the future.
- Because it accumulates, you’ve likely got a pretty hefty amount of contribution room available. If you were 18 in 2009, you’ve got a cool $63,500 of contribution room as of January 1st, 2019.
- You can have as many TFSA accounts as you want, at as many financial institutions as you want, but the contribution limit is cumulative. You can’t just throw $6,000 into ten different TFSA accounts every year. That’s tax fraud, and sloppy tax fraud at that, because they will definitely catch you. (If you do overcontribute to your TFSA, here’s how to fix it.)
- Your contributions are made with after-tax dollars—so no, you won’t get a tax refund for contributing to a TFSA. (The tax magic happens later.)
Having a TFSA
- You can keep cash, mutual funds, securities (aka stocks and ETFs), GICs, bonds and “certain shares of small business corporations” in a TFSA account, according to the CRA. That’s right: it’s not just for the cash in your savings account, but more on that later.
- While your money is inside a TFSA, any growth it experiences is tax-free, even when you withdraw it. If your investments go up, that’s all yours—no tax bill required.
- You can move a TFSA from one bank or financial institution to another, but watch out for transfer fees. Some of them can run you $75 per account transfer. (Pssst: check to see if the company you’re transferring your money to will reimburse your fees. They might!)
Withdrawing from a TFSA
- The money you take out of a TFSA is not counted as taxable income. If you withdraw $5,000, you get to keep $5,000.
- Since it doesn’t count as income, your TFSA withdrawals also won’t impact any of your means-tested government programs. That’s right: you will still be able to collect the full amount of your employment insurance or Canada Child Benefit if you withdraw money from your TFSA. (Same goes for all the retirement-focused programs, but this is the millennial’s guide to TFSAs. You’re probably more worried what’ll happen if you’re unemployed or have a kid.)
- When you withdraw from a TFSA, the amount you withdrew gets added to your contribution room at the beginning of the next calendar year. Let’s say you take $10,000 out to buy a car (ahem I totally did this). As of the next January 1st, you’ll have that $10,000 contribution room back.
How You Can Use It
Since the TFSA is available to all Canadians over the age of 18, if you identify as a millennial, you can probably use a TFSA literally right now, even if you’ve never had a job.
Unlike the RRSP, the TFSA contribution room isn’t tied to the income you earn, so if you’re a new grad who maybe has a few years of part-time barista-ing under your belt, you’ve got just as much contribution room as anyone else your age.
You can use it to store any kind of money-holding-thing you want. You can use it as a savings account, or you can use it to hold stocks, bonds, mutual funds, ETFs, index funds, you name it. (There’s a primer on what those all are in my free Zero to Investing Hero email course, wink wink nudge nudge.)
The TFSA’s Horrible, Terrible, Totally Misleading Name
So there’s a persistent idea in the personal finance world that the TFSA has a horrible, terrible, totally misleading name. Why? Well, because people hear “tax-free savings account” and think that they should only use it as a savings account.
False! So very false. The TFSA’s real value comes from holding investments in a TFSA, not just using it as a savings account earning 0.001% interest.
That’s where the “any money you make in a TFSA is tax-free” part comes in handy, because if you invest your money inside of a TFSA and make a killing, that killing is totally tax-free when you withdraw it. When it comes to the long-term, like the compound interest you’ll earn on your retirement investments over 35 years in the workforce? That’s some hefty tax savings, and where the TFSA really shines.
Plus, remember how your TFSA withdrawals don’t count as taxable income? Yeah, that means that even in retirement, when you’re withdrawing dozens of thousands of dollars to fund your 17 dogs (or whatever you want to do with your retirement, clearly I am in no position to judge) you won’t owe a single dollar in taxes on that money.
Let’s all just take a second to remember how it felt when you realized how much tax was withheld on your first paycheque. Yeah, that’s how it will feel when all of us are old and start withdrawing from our RRSPs, only to hand thousands of it right back in taxes.
How You Should Use It
At the end of the day, there are only a few simple questions you need to answer to figure out how you, specifically, should use the TFSA. (And you can skip right to the last one if you’re really not into the whole planning-your-money thing yet.)
- Are you investing within your TFSA? If you can, you should be. If you’re totally unsure about this whole “investing” thing, I made a free email course to help you figure out the basics. It’ll even walk you through whether you should be investing right now.
- Do you have extra contribution room after you’ve invested your money? Let’s be real, you probably do, because $63,500 is a lot of money, and it is the rare millennial who can max out their TFSA on investments alone.
- If you do have extra contribution room, do you want to use it to tax-shelter your emergency fund or other big savings accounts? This can be a great way to shelter the interest your savings will earn in a high-interest savings account, and since it won’t impact your EI or other benefits when you withdraw it, it’s well-suited to the kind of withdrawals you’ll need to make in an emergency like a job loss.
- Are you letting cash savings get in the way of your investments in your TFSA? If you are, stop. If you have to prioritize what to put into your TFSA because you’re maxing it out (a
goodfantastic problem to have!) always prioritize your investments.
- Do you want to just open an account without worrying about it? Awesome, you can do that too. If opening a TFSA and using it to stash your cash is what gets you to open an account, go for it. You don’t need to be ready to invest yet to start getting comfortable with the account, and if your plan is literally “become comfortable while saving some money”? That is a great first step, and my hat is off to you. (Jk I don’t wear hats none of them fit my stupid giant skull.)
Once you have a plan, no matter how simple, you’ll be able to make the most of your TFSA from the get-go. And unlike the RRSP, you can always switch from a TFSA to an RRSP with zero negative tax implications if it makes more sense for you later.
But that’s an advanced maneuver, and the millennial’s guide to the RRSP is right over here. Let’s move on.
How One Millennial Uses a TFSA
To give you a (brief) idea of my storied history with my TFSA, here are all of the ways I have used it.
- When I opened it, I kept it in cash because the bank told me I didn’t have enough money to invest. (This was false, and if you don’t want to be tricked by stupid statements like that one, you should take my investing course. It’s free, and you totally do have enough money to invest.)
- I then raided it to buy my first in cash, because I didn’t have a set plan for the money… and I genuinely couldn’t afford to take on a car payment and car insurance at the same time. #millennial.
- After leaving it in cash for another full year, I transferred it to Wealthsimple. Since then, I’ve had it invested for over four years, earned about 7% on my money, and will pay zero tax on those gains in 30 years when I withdraw it. Plus, by then it’ll have grown even more. (If you want to start investing your TFSA, you can score a $50 bonus when you invest your first $500 through Wealthsimple via this link.)
- …. And if I ever needed it in case of a true, house-on-fire, the-world-is-ending emergency, I could access it without tax penalties and leave my RRSP alone. Not that I plan on raiding it again, but like, I could if the alternative was a true disaster.
If I found a good way to hold my emergency fund within a TFSA, I would totally do that too, because I am sooooooo far away from maxing it out, I can’t even tell you. However, right now my emergency fund is at EQ Bank to score that sweet 2.3% interest on my savings account, and that’s a good-enough solution for me for now.
So that’s it: your millennial guide to the TFSA.
Want to deep dive into the nitty-gritty details? Start with the government’s (actually helpful) TFSA details here.
Des, I am so excited about this because after opening my Tangerine account last week I sat down to have a bit of a ~confrontation~ with my bank accounts and realized that my emergency fund is totally fine. (My work contract ends in March so I have a pretty concrete idea of what needs to be in it — rent & food etc. until my lease on my Toronto apartment is up in August.)
SO that means I am finally ready to start saving a bit more long-term, and I had been thinking of opening a TFSA. I was super confused and actually about to email you out of desperation hahaha. This post is perfect timing!
One question for you, though — can TFSA accounts be housed at places other than banks? So your account using Wealthsimple is with them, and if you wanted it at a bank later (for some reason) you would have to transfer it? I’m thinking of giving a Wealthsimple a try so just wanted to clarify if I should be opening an account at Tangerine or if I open it at Wealthsimple.
THANK YOU for your blog & all these helpful posts ♥︎
Eeeeeeeee Kait this is the best comment ever, and I’m SO glad it was a helpful post! Thank you thank you thank you for totally making my day 🙂 (Also, SO MANY CONGRATS on your emergency fund! That is so baller!)
As for TFSAs, yes, you can definitely house them at places other than banks! I opened one directly with Wealthsimple, and then started the transfer process to move my existing Scotiabank TFSA over to them to invest it. You can move it the other way too, so if I ever did need to move my TFSA back to Tangerine, I’d open one with Tangerine and get them to set up the direct transfer! Other than a transfer fee, there’s usually no barrier to doing this, especially between those two companies (the only really painful penalty I can think of is if you invested in really high-fee mutual funds that charged you money to withdraw before a certain time period elapsed, but luckily, neither Tangerine or Wealthsimple does shady stuff like that!)
I am also just not over how nice it was of you to take the time to tell me this was helpful 🙂 I hope you have an awesome evening! And always feel free to email me or get in touch with questions like these!
Such a great breakdown and overview! I knew I could be doing so much more with my TFSA but was never really sure what the options were for me or where to start. I’m feeling very motivated after reading this post. Thanks!
Kate | http://www.petiteadventures.org/
Thank you so much Kate – yay! I’m so so glad it was helpful!
I wish the US had something similar to this! Is it equivalent to a US Roth IRA account? That is sort of what it sounds like. Are there any restrictions on how many years deposited money has to be in an account before a TFSA account owner can withdraw their funds?
I get the sense it’s pretty similar to a Roth, based on the limited amount I know about the US’s account options! And nope, no inherent restrictions on withdrawals – unless you get stuck in a fund with deferred sales charges or penalties to withdraw early, but that’s a whole different issue, haha.
Yes, this is basically a Roth account. Our government created it to offer savers a similar service that the US government offers.
One way you do get hit with fees is if you start investing in US funds through a TFSA. If you do that with your RRSP you don’t get hit with taxes, but the IRS will withhold gains on TFSA funds until you file the right paperwork with them. The RRSP has existed forever, and years ago the US agreed to recognize its tax-free status. The TFSA wasn’t around when this happened so it doesn’t get the same treatment. So if you want to invest in that US ETF while our dollar is at an all time high compared to US$, do it through the RRSP or get a fund in CAD$ and put that in the TFSA.
Solid article! Lots of great information in it
So, in another post you talked, or maybe commented, how it was a bad idea to just have money sitting in a savings account. But then I hear it’s also good to have 4-6 months salary saved up just in case. Should I really out this into an investment account? Is it really not a good idea to just have several different savings accounts?
Oh gosh, I’m so sorry if it came off as conflicting advice! Whenever I talk about not leaving money in savings, I mean that in relation to money you’re saving for the long term – aka over ten years. If it’s an account you think you’ll need to access in the next ten years – so a house downpayment, emergency savings, etc – then keeping it in cash, or something almost as secure as cash, is your best bet, and how I handle those types of savings.
The only money I feel really strongly should be invested is retirement savings, since I – hopefully! – won’t retire for a very long time, haha. I’m very much a fan of cash savings for short term goals! Does that clarify things?
I’m a soon to be new immigrant to Canada and your blog has been a life saver in understanding a lot of unfamiliar jargon 🙂 I really like the way you put forth advise as well ( I may be ravenous for information but it’s difficult to listen to advice that come off as too-preachy lol).
I have one big question for you. So the money we bring in when we first land in Canada is tax free. Is this money eligible to be invested in a TFSA?
Awww thank you so much for the kind words Ru (and for the heads up about checking for the comment!) Sadly your question is actually beyond my scope of knowledge when it comes to putting money into a TFSA, so my best advice would be to ask a professional financial planner! The one thing that I can say for sure is that you’ll only have contribution room for the year(s) you’ve been a resident of Canada and over the age of 18, so you will need to double-check how much room you have available. If you have the room, *my* understanding is that it doesn’t matter where the money comes from to make your contributions, and how your income is taxed is a totally separate consideration than whether it’s eligible to put into a TFSA—but again, I’d definitely recommend checking with a pro!
Thanks so much for this post. I have followed your blog for several years and always enjoy your advice.
I’m thinking of moving my Emergency fund into a TFSA since I’m unlikely to need it for a long time. I hope 🙂
Do you have any recommendations/ websites for finding the best rate for a savings account?