Understanding The TFSA & The Best Ways To Use It For Investing

This post may contain affiliate links. I may receive a small compensation when you click on such links at no cost to you. Read my disclaimer for more info.

Last Updated on January 7, 2022 by Yetty Akindele

What Is A TFSA?

TFSA (Tax-Free Savings Account) is a registered savings account or as I like to think of it as a tax-free investment account. It is an account type that makes investment income not subject to taxation at withdrawal following certain rules. Overall, the TFSA is one of the best mediums to be used for a large number of investment goals in Canada.

The tax-free savings account (TFSA) was introduced in 2009 by the Canadian government as a means to encourage people to save money. There are numerous financial instruments for which you can hold a TFSA.

These include traditional bank tax-free savings accounts, stocks, bonds, mutual funds, guaranteed investment certificates (GICs), and exchange-traded funds (ETFs).

Who Can Open A TFSA?

To open a tax-free savings account (TFSA), you should be a Canadian resident or non-resident, over 18 years of age with a valid Social Insurance Number (SIN).

How Does The TFSA Work?

Just like the RRSP, the TFSA has a yearly contribution limit. You can invest only a limited amount of money in your TFSA, yearly.

This amount is announced by the federal government at the beginning of each year. For 2021, the amount was $6,000. The 2022 TFSA contribution limit still remains at $6000. When you do not make any contribution to your TFSA for a year, the contribution room is rolled over to the following year.

Additionally, unlike the RRSP, you do not lose your contribution room when you withdraw money from your TFSA. However, you can only re-contribute any amount withdrawn from a current year in the following year.

Annual TFSA Contribution Limit Since Inception (2009 – 2022)

YearAnnual TFSA LimitTotal Contribution Room
Annual TFSA Contribution Limit Since Inception (2009 – 2022)

How To Calculate Your TFSA Contribution Limit

As of 2022, your accumulated TFSA contribution limit is $81,500 if you have been eligible to open a TFSA since inception.

However, it is possible for you to have made some contributions, making you unsure of the amount you have left in your TFSA contribution room.

If this is your case, you can find your available TFSA contribution room in your CRA MyAccount. Alternatively, you could get in touch with the CRA by giving them a call.

How Do I Invest In TFSA?

Below are some examples of qualified investments that can be held in a TFSA;

Savings Account

Generally, Savings accounts are one of the safest ways to invest your money albeit with a lower ROI. The additional insurance that comes from organizations such as the CDIC makes them no-risk investments.

Currently, EQ Bank offers one of the highest interests on a TFSA in Canada. A 1.25% non-promo rate. EQ Bank TFSA offers a low-risk way to grow your money with the option to withdraw tax-free, with no monthly fees, and no minimum deposits.

You should also note that money deposited in EQ Bank is CDIC insured up to $100,000 like most CDIC insured institutions. EQ Bank allows a maximum of $200,000 to be held within your account.

Opening an account on EQ Bank is a very straightforward process and can be done within 5 minutes right from your couch. You should deposit as soon as opening the account so you can begin enjoying the interest which is calculated daily and paid out monthly.

Guaranteed Investment Certificates (GICs)

GICs (guaranteed investment certificates) are among safe and low-risk investments. The good option with GIC is that you can also hold TFSAs within them. This is known as a TFSA GIC (tax-free savings account GIC).

GICs are an option for Canadians as an investment vehicle. It allows a means to save money, with a guarantee of the return of the principal and a predefined locked-in interest rate for a specific period of time. Most times with GICs, the longer your investment term, the higher your guaranteed rate of return.

With a regular GIC, you must claim the interest on investments as earnings for personal income tax purposes. However, any income earned on a TFSA GIC does not have to be claimed as income for tax purposes. Essentially, a TFSA GIC is a GIC that you earn interest on tax-free.

EQ Bank also offers a TFSA GIC account that allows you to lock in your savings while growing them tax-free at a guaranteed return rate for a defined period. For a limited time until January 20th, 2022 earn a 2.00% interest on an EQ Bank TFSA held in a 3-month GIC.

Stocks/equities and bonds

By investing in the stock market, you stand a chance at getting a significant return over a small investment. However, stocks and bonds are high-risk investments. They may be held within a TFSA, but the account owner should have a high level of financial risk tolerance.

You can open a TFSA and invest in stocks and bonds using online brokerage platforms such as Questrade, one of Canada’s most trusted trading platforms. Usually, online brokerages have the advantage of low management expense ratios (MER).

Questrade offers no annual account fees, no opening or closing fees, the option to have both Canadian and US dollars in the same account at the same time, and up to $50 rebates in commission trades

Additionally, online brokerage platforms usually have options of either a hands-on self-directed investment option or investing on auto-pilot using Robo-advisors.


Exchange-traded funds (ETFs)

ETF is best defined as a basket of investments. ETFs are frequently pegged such that they can follow a particular market index. ETF can characteristically be a mix of stocks, bonds, commodities, or each of the aforementioned. It is on an exchange that they are sold or bought.

Rather than investing all your money in one particular stock, ETFs allow a way to reduce your losses by having a diversified investment portfolio. Just like stocks and bonds trading, ETFs can be done via online brokerage platforms. Wealthsimple Trade offers a way to buy and sell ETF commission-free.

Once you create an account on Wealthsimple, you get the option to open a TFSA as well from within your dashboard.

Mutual funds

Mutual funds have similarities with ETFs but are more diverse. However, Mutual funds are managed actively by a portfolio manager, unlike ETFs. The fees charged are correspondingly higher than ETFs or stocks.

Earnings over mutual funds are not taxed, and the degree of risk and potential returns are subject to the mix of assets within the funds.

Mutual funds make a preferable choice for long-term investment. An investor characteristically has numerous options for investing in mutual funds, depending upon his risk tolerance. With a Questrade account, you can also trade Mutual funds.

Should You Have Multiple TFSA accounts?

There are technically no limits to the number of tax-free savings accounts (TFSA) you can hold. However, you should exercise care in ensuring that you do not exceed your net contribution limit.

Excess contributions outside of your contribution limit attract penalties in the form of a 1% per month penalty tax. So if you over contributed by $3000, you would pay a penalty of $30 monthly, for as long as you have the excess amount in your TFSA.

A common reason why most people make over-contribution to their TFSA is because of a misconception with the rule of the TFSA withdrawal and subsequent re-contribution.

While the TFSA offers the flexibility of penalty-free withdrawal at any time, any amount withdrawn can only be recontributed by January 1st of the next year.

What Is The Best Way To Use My TFSA?

The answer to this question is not clear-cut as it depends on your unique situation. However, there are a couple of ways to look at it and those are mentioned below.

The TFSA is an option to start saving as early as the age of 18. This could go a long way to help safeguard one’s future and keep financial worries at bay.

TFSAs come to be particularly useful for younger people who have short-term goals for savings. This is because the money can be withdrawn at any time without getting taxed and considering that they still have the advantage of the time to contribute, this could be of advantage.

Additionally, this is more true when you consider the power of compounding interest in an account for which interest earned is not taxable.

Using TFSA As An Emergency Fund

TFSA may be used as an emergency fund because the money grows tax-free and the withdrawals are penalty-free.

It is essential to keep a tab over TFSA contribution withdrawals. Like I stated earlier, upon withdrawing from TFSA, the amount withdrawn can’t be replaced for in that year if you have maxed your contribution room.

You need to be sure of whatever contribution limit you have left if you withdraw from a TFSA before making a re-contribution.

If you are using your TFSA as an emergency fund or for a short-term goal such as saving for a house down payment, there is no point in opening a low-interest TFSA.

You should open a high interest no monthly fee TFSA that will help grow your money while giving you the flexibility of anytime withdrawal since the money isn’t locked in a maturity investment such as GICs.

Using TFSA For Long Term Goals

The TFSA could also be used for long-term goals, such as saving for retirement or college funds. For this option, you might want to look into longer-term investments such as stocks and ETFs. You

Differences Between TFSAs and RRSPs

For Canadian citizens and residents, the TFSAs and RRSPs are both options for long-term savings that offer sufficient room for tax protection. A primary point of difference among TFSAs and RRSPs is the timing for the payment of taxes.

In the case of TFSAs, taxes have already been paid for money contributed to the account, so, you do not pay upon withdrawal, neither do you pay taxes on the investment income. Essentially, this could be of advantage if your marginal tax rate is higher when you withdraw the money from the TFSA.

However, in the case of RRSPs, for the year that you earn and contribute the money, it is tax-free. But when one withdraws the money following retirement, one pays taxes over it. Hence, RRSPs offer tax deferral advantages. This could be of great advantage if you have a lower marginal tax rate upon retirement.

Overall, RRSPs make a better choice for the high-income group earners who are aiming at making a good retirement income. In the remainder of cases, most times, the TFSAs make a better choice.

Let Us Now Consider The Pros and Cons Of TFSAs

Pros Of TFSA

  • Tax exempted earnings over investments compound to be a significant amount over a while.
  • Options for withdrawal are flexible and penalty-free.
  • While you have a TFSA in your name, you won’t be penalized for the years when you make less contribution than the caps to the amount, or even if you withdraw funds.
  • Ideal savings option if you earn a low income (>$35,000)
  • A better preference for retirement planning if you expect to be in a higher tax bracket at retirement.

Cons Of TFSA

  • Contributions to a tax-free savings account will not result in instant tax savings. RRSP is a better-suited option when on the lookout to maximize tax savings.
  • Over contribution results in strict penalties, 1% monthly.
  • When you withdraw money from the TFSA, you can only repay it in the following year.

Tax-Free Savings Account (TFSA) FAQs

I just turned 18, in 2022, what is my contribution Limit?

Your contribution limit will be the full 2022 tax-free savings account dollar limit.

I can’t open a TFSA until I turn 19 in my province, what will my TFSA limit be?

For provinces or territories where the legal age to enter into contracts (for which a tax-free savings account is one) is 19, your contribution limit will be a sum of the limit for the year you turned 18 and that of the year you turned 19.

Is maxing out TFSA a good idea?

In all likelihood, it is, as long as you don’t over-contribute. If you are thinking of using the tax-free savings account (TFSA) for a long-term savings goal, then it is better to ensure that you have emergency funds for use in a separate type of high-interest saving account. Offering higher return rates than most brick and mortar banks.

This is because you lose the option to recontribute to a tax-free savings account if you had maxed out your contribution room and then made a withdrawal. Hence, you miss out on the benefits of compounding interest and the tax advantages that a TFSA offers.

By maxing out TFSA, you can get maximum advantage of the tax benefits offered by the account. Over contribution, nevertheless, results in some penalties.

What is my Tax free savings account (TFSA) contribution limit as a new immigrant?

Your TFSA contribution limit as a new immigrant starts to count the year you immigrated into Canada after 2009. Take for instance, if you arrived in Canada in 2019 and made no contributions to your tax-free savings account, your available TFSA contribution room in 2021 will be $6,000 (2019) + $6,000 (2020) + $6,000 (2021) = $18,000.

This simply means your TFSA limit is based on the year you immigrated to Canada. You will also find your limits in your CRA MyAccount.

What happens to my TFSA if I expire?

In case you have designated a beneficiary for the tax-free savings account, the account will be transferred to them and they can take care of all the holdings. This could be anyone, spouse, children, or common-law partners.

Another significant point in this regard is that the income in the tax-free savings account, and also the interest it earns is sheltered from tax, even while it is under the new holder or the successor.

Can I open joint TFSA?

No, joint TFSAs are not an option. There can only be one owner of a tax-free savings account. The primary underlying reason behind this is that each person has his own contribution limits. There is no way to combine this with someone else’s contribution limits.

One can nevertheless designate successor holders and beneficiaries over the account.

Can I use my TFSA as collateral for a loan?

Yes, the assets within a tax-free savings account may be used as collateral for a loan. However, this may come with a restriction, that you cannot withdraw funds from the TFSA until the loan is paid off.

In conclusion, without a doubt, the tax-free savings account (TFSA) has many advantages for both short and long-term goals. If opening a regular TFSA, you should put it in a high-interest account type.

However, if you would like to hold your stocks, bonds, ETFs, etc. in a tax-free savings account, you should sign up for the services of the best online brokerages mentioned in this article.


Leave a Comment

Your email address will not be published. Required fields are marked *