Personal Finance Basics - What Is A TFSA
What personal finance blog is complete without a primer on TFSAs and the writer’s opinions on this brilliantly misunderstood account type? So here it is - my take on the TFSA, what it actually is, and how to use it without falling for the usual internet nonsense.
What Is a TFSA?
TFSA stands for Tax-Free Savings Account. And yes, the name is terrible. Unlike the RRSP, the TFSA still hasn’t fully shed its “savings account” image. But it’s getting there.
Just like the RRSP, the TFSA is simply an account type. It’s not a product. You don’t “buy a TFSA.” You open a TFSA and hold things inside it like cash, GICs, ETFs, stocks, bonds, whatever fits your financial plan.
The key difference from the RRSP is this: You contribute after-tax dollars to a TFSA. But the growth? The withdrawals? The interest? The dividends? All of it is tax-free...forever.
And best of all: when you withdraw money, you get that contribution room back the following calendar year. No penalties, no tax bill, no weird paperwork. It’s beautifully simple.
How Does It Work?
Because a TFSA is just an account type, you need to open one at a bank, credit union, or brokerage. One important heads-up: some institutions default to creating a TFSA high-interest savings account, which is fine for cash but useless if you plan on buying securities. So before opening one, make sure you’re getting the right kind of TFSA for your needs. For what it’s worth, I’ve been using Questrade for almost 15 years and it does everything I need.
Here’s the basic workflow once you’re set up:
1. Check your contribution room
Log into your CRA MyAccount and find your TFSA room. If you were 18 or older in 2009 and you’ve never contributed, you likely have the full accumulated room. If you turned 18 recently, your room starts building from the year you turned 18, not before.
As of the time of writing, the annual contribution limit is $7,000.
2. Deposit money
You can contribute up to your annual limit or your total accumulated room. Just don’t go over...CRA penalties are not fun.
3. Invest or save
Once the money is inside your TFSA, you can invest it or simply keep it as cash. Personally, I treat TFSAs as long-term investment vehicles and put securities in mine.
4. Withdraw whenever you want
Withdrawals are not taxed and they do not count as income for benefits or tax calculations. Your contribution room for that withdrawal comes back January 1 of the next year, plus the new annual limit.
That’s really it. The TFSA is one of the simplest, most flexible tools in Canadian personal finance.
Why I Like TFSAs
- They’re flexible.
- They’re tax-efficient.
- They don’t punish you for withdrawing money when you actually need it.
TFSAs are especially great for things like REITs and fixed-income securities, where tax treatment in non-registered accounts is usually terrible.
And, like I mentioned in my RRSP post, TFSAs pair extremely well with RRSPs. If your income isn’t high enough for RRSP contributions to generate meaningful tax advantages, a TFSA is often the smarter first choice.
TFSA Myths
Let’s look at some myths that I have seen online or heard from friends and colleagues.
Myth #1: “The TFSA is just a savings account.”
It hasn’t been “just a savings account” since 2009. I already mentioned that the name is misleading.A TFSA is an account type, not a product. You don’t “buy a TFSA.” You invest inside one: ETFs, stocks, GICs, bonds, cash, whatever. Treating it like a plain savings account is like buying a garage and never parking a car in it.
Myth #2: “TFSA contributions lower your taxable income.”
Wrong account.That’s RRSP behaviour. TFSA contributions are made with after-tax dollars. The benefit is on the growth, which is 100% tax-free forever (even on withdrawal). No tax refund, just tax-free compounding.
Myth #3: “Withdrawals affect your benefits (GIS/OAS/etc.).”
They don’t. Period.See previous myth and explanation. TFSA withdrawals do not count as income for any government benefit calculations. This alone makes the TFSA the single most powerful low/middle-income retirement tool in Canada. RRSP withdrawals do affect benefits; TFSAs don’t.
Myth #4: “It’s better to max your RRSP first, then your TFSA.”
Sometimes yes, sometimes a terrible idea. It all depends on your income and the tax bracket you are in.
RRSPs shine when your current income is high and your retirement income will be lower. Otherwise? The refund isn’t worth it because you’ll just be paying tax later at the same or higher rate.
TFSAs are great for:
- low/middle-income earners
- people with pensions
- people who want flexibility
- anyone trying to avoid GIS clawbacks
This “RRSP first” advice is lazy, blanket advice that ignores the math.
Myth #5: “You should use your TFSA for emergency savings.”
You can, but most people shouldn’t once they have a significant amount of money. I used it as a savings account for the first couple of years after its introduction.If your TFSA is full of long-term investments (ETFs, stocks), it should stay that way. Using it like a chequing account kills compounding and often forces you to sell during downturns.
A better approach would be:
- Keep emergencies in a HISA
- Keep investments in your TFSA The TFSA is a wealth engine, not a rainy-day piggy bank.
Myth #6: “TFSA withdrawals take up contribution room forever.”
You get it back next January 1.If you withdraw $10,000 today, you get exactly $10,000 of new room on January 1 of next year, on top of the annual limit.
Myth #7: “You can get in trouble for trading stocks in a TFSA.”
Not for most trading, but for significant and frequent day trading.The CRA doesn’t care if you trade in your TFSA. Day trading isn’t automatically banned. But high frequency day trading is another story. Normal people aren’t falling into this. Social media fearmongering is overblown.
Myth #8: “You can put anything in a TFSA.”
No, it has to be a qualified investment.Qualified investments include:
- ETFs
- Stocks
- Bonds
- GICs
- Mutual funds
- Cash
Not allowed:
- Crypto directly
- Land
- Businesses
Though you can buy crypto ETFs in a TFSA. Crypto bros hate this nuance.
Myth #9: “There’s no point investing small amounts — the TFSA doesn’t grow.”
Even tiny contributions compound into something ridiculous. I started my Questrade TFSA with an $800 tax return. Checking for growth, that $800 is now worth just a little over $5,000 over the last 13 years, including reinvesting dividends. It was XUS for those interested.
Let’s do some math:
- $100/month at 6% for 30 years = $100,000+
- $250/month = $300,000+
- $500/month = $600,000+
And it’s all tax-free.
Myth #10: “You can use your TFSA for speculative gambling because losses don’t matter.”
A capital loss inside a TFSA is permanent.
You don’t get:
- contribution room back
- a tax deduction
- any offset against gains
When you blow up your TFSA, you permanently shrink its lifetime capacity. Treat it like the sacred space it is.
Myth #11: “TFSA accounts are only for young people.”
Seniors can also benefit massively.TFSAs are ideal for seniors because withdrawals:
- don’t increase taxable income
- don’t reduce GIS
- don’t raise OAS clawbacks
- don’t affect CPP
Many seniors convert RRSP/RRIF withdrawals into TFSA room over time to reduce future taxes.
Myth #12: “You can’t hold U.S. stocks in a TFSA.”
You absolutely can. However, what you can’t avoid is the 15% withholding tax on dividends.
As I have mentioned before, TFSAs are a great tool to use alongside RRSPs for long-term wealth building.
It is not one or the other, it should be both TFSA and RRSP.
