The federal government introduced the tax-free savings account (TFSA) in 2009. It’s been gaining popularity ever since, and it's as popular as ever. According to Statistics Canada, 15 million Canadians had opened at least one TFSA by the end of 2019.

It’s easy to see why. TFSAs are super flexible. You can contribute any time, to a yearly maximum. And withdraw funds whenever you need them. Best of all, any investment you hold inside your TFSA grows tax-free.

You can use your TFSA to help pay for a new home, your children’s education, a dream project or even retirement. And you’re not taxed when you take the money out, either.

Don’t have a TFSA and want to open one? A Sun Life advisor can get you started.


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How much can you contribute to your TFSA?

For 2022, you can contribute up to $6,000 to your TFSA. And you can carry forward unused contribution room from previous years.

You have more questions about TFSA contributions? Find answers on our TFSA page.

Despite the versatility of TFSAs, there are some potential slip-ups to watch out for. Here are four, courtesy of Cliff Steele, a certified financial planner with Sun Life.

4 common TFSA mistakes

4 common TFSA mistakes

Mistake 1: Holding cash in a TFSA.

Mistake 2: Withdrawing TFSA cash to set up another TFSA.

Mistake 3: Over-contributing to a TFSA.

Mistake 4: Not opening a TFSA at all.

1. Holding cash in a TFSA

Sure, they have the words “savings accounts” in their title. But TFSAs have little in common with everyday chequing and savings accounts. To Steele, that means one thing: They’re no place for cash.

“I see a lot of people holding cash in a TFSA, making nothing,” says Steele. “Or in a daily interest account [inside their TFSA], making 0.25% a year or so.”

“They’re getting almost no savings out of that,” he adds. “Because if you haven’t earned a meaningful amount of interest, you don’t have to pay tax on it anyway.”

Instead, talk to an advisor about other higher return investments that you can hold in your TFSA.

2. Withdrawing cash to set up a new TFSA

If you’re changing financial institutions, you should pay particular attention to your TFSA. Why? Because moving cash from an existing TFSA to a new one could affect your contribution room. “Remember that if you make a withdrawal, you can’t recontribute until the following January 1,” says Steele.

“Let’s say you withdraw all the funds from your TFSA. Then you set up a new TFSA somewhere else and deposit this money into it,” says Steele. “That entire deposit would count as a new contribution for the year. And, it could trigger an over-contribution penalty.”

The solution? Have your new financial institution make a direct transfer on your behalf.

3. Over-contributing to a TFSA

Many people go over their TFSA contribution limit without knowing it. This happens when they withdraw and deposit money in the same year. They're treating their TFSA like an everyday bank account.

“The thing to remember is that on January 1, you gain two things. The first is more contribution room. The second is that you also get back the room from withdrawals you made in the prior year,” says Steele.

The penalty? The Canada Revenue Agency (CRA) charges 1% per month for any amount over your total TFSA limit until you take it out.

4. Not opening a TFSA at all

It’s still a common myth you may have heard. You’ve lost out on years of contribution room if you didn’t open a TFSA in 2009. Actually, you’ve missed out on the investment growth you could have realized. You haven’t lost any contribution room.

“Even if you haven't opened a TFSA yet, your contribution limit has been growing,” says Steele. The bottom line? TFSAs offer tax-free growth and the ability to access your cash at any time. That of course is subject to the terms of the investments in your TFSA. This could include restrictions on withdrawals or guarantees that could be affected by a withdrawal. That makes them a great companion to other investment tools, like RRSPs.

Want to make sure you’re maximizing your TFSA? Find an advisor today