How TFSAs Work and How to Make the Most of Them
With many Canadians unsure about what a TFSA is or how it works, we'll get you started with the basics.
Updated 
12 min. read
A TFSA is a registered account that lets you save or invest money while earning tax-free growth, including interest, dividends, and capital gains as long as you stay within your contribution limits- Benefits include tax-free growth and withdrawals, flexibility for both short and long-term goals, and no impact on income-tested government benefits
- TFSAs can hold a variety of investments such as mutual funds, ETFs, GICs, bonds, and stocks
- It is important to understand contribution rules. Unused room carries forward, withdrawals are added back the following calendar year, and over-contributions can trigger CRA penalties.
Growing your savings is always good, but not paying taxes on that growth is even better. With a tax-free savings account (TFSA), Canadians can grow their hard-earned money without paying tax on their growth. That said, before you open a TFSA, there are some key rules, features, and tips you should know to make the most of your savings.
What is a TFSA?
Introduced in 2009 as a savings encouragement tool, a TFSA is a registered account that lets Canadians save and invest without paying tax on growth, including interest, dividends, and capital gains. So, while you can use a TFSA for cash savings, its real strength lies in its ability to invest across a variety of assets tax-free. Depending on the terms of your investments within a TFSA, you can make tax-free withdrawals at any time.
It’s important to note that the Canadian Revenue Agency (CRA) sets an annual limit on how much you can contribute to a TFSA. The good news is that any unused room from previous years carries over indefinitely, meaning you won’t miss out if you don’t contribute the maximum in a given year.
In most provinces and territories, any Canadian resident who is 18 or older with a valid social insurance number (SIN) is eligible to open a TFSA. In regions where the age of majority is 19, you’ll need to wait an extra year, but your contribution room still starts accumulating at 18. Note that even if you’ve never opened an account, you’ve been building contribution room since 2009 (or from the year you reached the age of majority or became a resident, whichever is later).
What are the benefits of a TFSA?
Wondering why you should open a TFSA? While some reasons may be more apparent, storing your money in this kind of account has several advantages you might not have considered.
Tax-free growth
Any gains (interest, dividends or capital gains) generated through investments within your TFSA grow tax-free while held in the account and are not taxable when withdrawn.
Tax-free withdrawals
Not only does your TFSA offer tax-free growth within the account, but there are no taxes when you withdraw funds either. You can also withdraw as much funds as you’d like at any time, making it easy to use your money when you need it (although there may be certain limitations depending on the terms of your investments).
Supports any financial objective
A TFSA gives you flexibility to save for any purpose, whether it’s for a short-term goal like a vacation or emergency fund, or a long-term one such as retirement planning (especially if your RRSP is already maxed out). As a registered plan that combines elements of savings accounts with substantial tax benefits, TFSAs are among the most versatile accounts that Canadians can take advantage of.
Lifetime contribution room
Unused contribution room carries forward indefinitely, and any withdrawals you make from your TFSA can be added back to your room the following year on January 1st. So, if you can’t make your annual contribution one year, or run into unexpected expenses and need to dip into your savings, you can make up the difference down the road without sacrificing that room.
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No impact on government benefits and credits
When you take money from a TFSA, it doesn’t count as income, so it doesn’t affect your GST credit or Employment Insurance (EI). Withdrawals from your TFSA also don’t affect income-tested government programs, such as:
- Old Age Security (OAS)
- Guaranteed Income Supplement (GIS)
- The Canada Child Benefit
With this in mind, TFSAs are powerful tools for people across all income levels who should consider including one in their financial portfolio. They can make a sizable difference for lower earners wanting to supplement their income without affecting government support.
Easy to set-up and use
TFSAs are easy to open, access, and contribute to, making them a great way to start saving right away. At BMO, you can easily open an account in person at any branch with the help of a BMO Investment Professional, or online with BMO InvestorLine. To make contributing even easier, you can set up a Continuous Savings Plan (CSP) to add an amount you’re comfortable with to your TFSA (or other investment accounts) automatically on a schedule that works for you.
While TFSAs are easy to open, remember to pay attention to your contribution room limit as it applies across all TFSA accounts you have.
Investment options in a TFSA
So, what exactly can you hold in your TFSA? While cash is certainly an option, you may be able to get even more out of your account by considering investment products. TFSAs can hold a wide range of investments, such as:
- Exchange-traded funds (ETFs)
- Guaranteed investment certificates (GICs)
- Bonds
- Stocks
All growth from these investment types remains tax-free in a TFSA, including interest, dividends, and capital gains. That said, it’s important to note that you cannot claim capital losses if they occur inside a TFSA. Foreign withholding taxes may apply depending on the country and investment type, and are not recoverable within a TFSA.
It’s also important to note that when thinking of investing, your choices should be based on your personal financial circumstances and risk tolerance. GICs, bonds, mutual funds, and ETFs all carry different levels of risk which depend on their underlying holdings so it’s a good idea to speak with an investment professional when deciding how to invest in your TFSA.
Contribution room and limits
Remember that the CRA sets a limit on how much you can contribute to your TFSA each year, and that any unused contribution room from previous years carries over in subsequent years.
You can find your current TFSA contribution room by logging into the CRA My Account website. Keep in mind, though, that if you’ve contributed to your TFSA in the current tax year, that amount won’t be reflected in your total limit on the website.
Alternatively, you can calculate your TFSA contribution room by adding:
- The current year’s contribution limit
- Plus unused contribution room from previous years
- Plus withdrawals made in the previous calendar year
- Minus any contributions made in the current year
The following table shows the annual TFSA contribution limits per year since TFSAs were created in 2009, as well as the total contribution room you’d have accumulated if you were eligible that year.
| Year | Annual Limit | Total Room |
|---|---|---|
| 2009 | $5,000 | $5,000 |
| 2010 | $5,000 | $10,000 |
| 2011 | $5,000 | $15,000 |
| 2012 | $5,000 | $20,000 |
| 2013 | $5,500 | $25,500 |
| 2014 | $5,500 | $31,000 |
| 2015 | $10,000 | $41,000 |
| 2016 | $5,500 | $46,500 |
| 2017 | $5,500 | $52,000 |
| 2018 | $5,500 | $57,500 |
| 2019 | $6,000 | $63,500 |
| 2020 | $6,000 | $69,500 |
| 2021 | $6,000 | $75,500 |
| 2022 | $6,000 | $81,500 |
| 2023 | $6,500 | $88,000 |
| 2024 | $7,000 | $95,000 |
| 2025 | $7,000 | $102,000 |
| 2026 | $7,000 | $109,000 |
Making withdrawals, recontributions, and transfers
You can withdraw money from your TFSA at any time without paying tax, but the timing of when you put it back matters. You can only recontribute that same year if you have unused contribution room available. If not, you will have to wait until the next calendar year when the amount you withdrew is added back to your overall contribution room. Putting money back into your TFSA too soon can trigger an over-contribution penalty of 1% per month on the excess balance.
For example, if you’ve maxed out your TFSA for 2026 and withdraw $3,000 later in the year, you should wait until January 1, 2027 when that amount is added back to your contribution room to avoid any penalties (in addition to that year’s annual limit).
Transfers between TFSAs can also get a bit tricky. Typically, a direct transfer between TFSAs of different institutions does not affect your contribution room. However, be aware that if you withdraw money from one TFSA and deposit it into another, the CRA will view it as a new contribution, which could end up exceeding your limit.
Mistakes to avoid
If you exceed your contribution limit, you’ll be penalized at a rate of 1% of the excess amount for every month that an over-contribution sits in your account.
Moreover, some taxpayers get confused – and then in trouble – with the rule on withdrawals. So, be sure you understand how they work. To reiterate: a withdrawal will create contribution room of that amount in the next year, not the current one. If you mistakenly replaced that withdrawal within the same calendar year, your error would be considered an over-contribution, which is subject to CRA penalties.
Also, ensure your TFSA doesn’t include any prohibited investments. For example, you can’t use it to keep shares of a company where you, or anyone related to you, have a significant interest (10% or more), nor can you hold non-qualified assets. If you do, you may be required to pay a tax equal to 50% of the value of the asset.
Running a business, such as frequent day trading, within your TFSA is also disallowed and subject to tax consequences. Finally, bear in mind that if you borrow money to invest in a TFSA, you’re not allowed to write off the interest payments from your taxes.
How to open a TFSA
Opening a TFSA is a straightforward process, especially at BMO where there are multiple convenient ways to go about it. You can:
- Visit your local BMO branch
Or, if you prefer to manage your TFSA investments on your own, you can also open an account online in just a few steps.
Interested in the different ways to invest in a TFSA at BMO? Check out this table that breaks down what you need to know:
| Investing solution | Best for | Account management | Recommended investment | Investment products |
|---|---|---|---|---|
| BMO investment professional | Guided/Hands-off | Professionally managed | Varies by advisor | Mutual funds, portfolios, GICs |
| BMO InvestorLine Self-Directed | DIY/Experienced | Self-managed | None | Stocks, bonds, mutual funds, ETFs, GICs, CDRs, options |
| BMO InvestorLine adviceDirect | Hybrid/Semi-guided | Self-managed with expert advice | $10,000+ | Stocks, bonds, mutual funds, ETFs, GICs |
| BMO SmartFolio | Passive/Beginner | Robo-advisor | $1,000+ | ETF portfolios |
Conclusion
With tax-free growth, a TFSA may help you grow your money faster than traditional savings accounts while maintaining their level of accessibility and flexibility. While you can deposit cash into your TFSA, the real magic is that you can store investment products within it and watch your savings grow, all without having to lose any of your earnings to taxes.
While this kind of account has its rules and contribution limits, many Canadians benefit from using it to save for financial goals of all shapes and sizes. In a nutshell, your money stays available to you while growing tax-free and is something worth looking into. Opening a TFSA at BMO is quick and easy, so don’t hesitate to start taking advantage of tax-free savings.
What is a TFSA: FAQs
The best investment to put in a TFSA depends on your financial goals and the level of risk you’re willing to take on. The best way to figure out how to invest in your TFSA is with expert guidance from an investment professional.
The most obvious difference between the two is how earnings are taxed. In a regular savings account, interest earned is taxable, while growth realized within a TFSA is tax-free. If you have the room, you may want to consider moving money from a taxable account into a TFSA as part of your overall investment strategy.
The main difference between an RRSP and TFSA is that an RRSP is tax-deferred, meaning it offers a tax deduction upfront on contributions. However, any contributions and investment gains that have been withdrawn will be taxed. On the other hand, a TFSA doesn’t reduce taxable income upfront but allows tax-free withdrawals and growth. Unlike RRSPs, TFSAs have no age limit for contributions and are ideal for accessing funds without tax consequences before retirement. So, while RRSPs are ideal for longer-term goals like retirement, TFSAs offer more flexibility in how and when you can use your tax-advantaged savings.
There is no age limit to TFSA contributions, which means you can continue to benefit from tax-free growth throughout your lifetime. The more you contribute annually (up to your limit), the more you can benefit in the long run.
Yes, unlike registered retirement savings plans (RRSPs), you can contribute to your TFSA every year after you reach the age of majority in your province or territory. For many Canadians, it’s a good idea to keep contributing after 65 as the more you contribute, the more you’ll benefit from tax-free earnings.
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