The Tax Free Savings Account

Learn more about this gift from the Canadian Government and how it can help with your financial goals.

*I am not a financial adviser, please consult a financial expert when making financial decisions. This blog is based on my personal experiences and not to be used as financial advice.

What is a TFSA?

A TFSA is a registered tax-sheltered account implemented by the Federal Government in January 2009. Depending on what province you live in, you can open a TFSA at age 18 or 19. In Newfoundland, where I am from, you need to be 19 years of age.

My understanding of a TFSA is that money you invest in a TFSA has already been taxed and can reside in the TFSA to grow tax-free. Earnings can come from dividends, interest, and capital gains from eligible investments.

What does this mean?

It is not taxable income when you withdraw money from your TFSA. For example, if you are employed earning $70,000/year, and withdraw $10,000, say for the down payment on a home, your annual income is still considered 70,000, not 80,000 come tax time.

Hence the term "tax-sheltered account" because the money already taxed can grow tax-free if placed in a TFSA:)

How much money can I contribute?

Every year a fixed amount is established as the "contribution room limit." This limit is the maximum annual contribution amount you can invest into your TFSA. For 2022 the contribution limit is $6,000.

However, if you have not yet opened a TFSA, you have unused contributions. Once you reach your province's maturity age to open an account, your contribution room starts and builds every year by the set amount.

For example, I was born in 1989, and according to Canada.ca, the following are the set contribution amounts from 2009-to 2022.

YEAR	Contribution Limit
2009	5000
2010	5000
2011	5000
2012	5000
2013	5,500
2014	5,500
2015	10,000
2016	5,500
2017	5,500
2018	5,500
2019	6000
2020	6000
2021	6000
2022	6000

In 2009 I was 20 years old. I, therefore, have the following contribution room available $81,500.00 (sum of the annual limits above), and this amount increases every year!

At the age of 20, if I invested in a TFSA and maxed out my contribution room each year, I would have a contribution room of $6,000 available at the time of this writing in January 2022.

But wait, there is more!

If I withdraw from my TFSA, that amount gets added to my contribution room for the following year.

For example, in 2021, I withdrew $1,000 from my TFSA, and I now have a contribution room of $7,000 in 2022.

($6,000 (2022 limit) +1,000 (2021 withdrawal amount) = $7,000)

Assuming I had maxed out my limit every year since 2009.

It gets better; the contribution limit is the amount you can invest and does not impact the amount you gain inside your TFSA.

If I have maxed out my contributions by investing my taxed dollars of $81,500, I may have gained $15,000 in compounding interest since 2009. That gives me an account total of $96,500.

Let's assume that the contribution room in 2023 will also be $6,000. I will still get that contribution amount, regardless of how much I have earned inside my TFSA.

Visit Canada.ca to learn more about your unused contributions, eligible investments, and other important information regarding a TFSA.

How do I open a TFSA?

To open a TFSA, you can contact your financial institution, insurance broker, credit union, or online brokerage and wealth management firm.

You can choose to self-direct your funds or have someone manage them for you. The decision is yours!

At this writing, I have been investing through a TFSA with Questrade. They are a Canadian online brokerage firm and wealth management firm. You can visit their website questrade.com to learn more about Questrade and how you can open a TFSA.

I will also discuss my portfolio with Questrade in a future post:)

Benefits with a TFSA

There are many things I am excited to benefit from using my TFSA. One is how a TFSA will serve me in my retirement years.

Currently, I work for a company with a defined benefit pension plan. I am guaranteed a specific monthly payment for life after retirement, assuming I meet all conditions.

Let's assume I retire at 60% of my annual salary, which was $80,000. That's now a yearly salary of $48,000 for the rest of my life.

80,000(0.60) = $48,000

Maybe I want more money during retirement, but I don't want to boost my income and pay higher taxes.

I can budget my finances accordingly to supplement my retirement income but only tax the $48,000/year.

For example, I can take out $10,000 from my TFSA, which does not affect my taxable income. My taxable salary remains $48,000/year.

Yes, this is legal! Because the money I invested in my TFSA was already taxed income. The earnings inside a TFSA are tax-sheltered and therefore not considered income upon withdrawal.

To learn more about a TFSA and what is suitable for you, speak to your financial adviser.