The federal government introduced the tax-free savings account (TFSA) in 2009. And it’s been gaining popularity ever since. According to Statistics Canada, 16 million Canadians opened at least one TFSA by the end of 2020.

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 (keep in mind, there are re-contribution rules). 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. Or even your children’s education, a dream project, or 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 2024, you can contribute up to $7,000 to your TFSA. And you can carry forward unused contribution room from previous years.

Do 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 you should consider.

1. Contributing over your TFSA limit

It’s possible to go over your TFSA contribution limit without knowing it. This happens when you withdraw and deposit money in the same year. 

It’s important to remember that on January 1, you gain two things. The first is more contribution room. The second is you also get back the room from withdrawals you made in the prior year.

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

2. 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. That means one thing: they’re no place for cash.

If you’re only using your TFSA to hold cash, you could be missing out on tax savings that come from investments that grow in value over time tax-free. Instead, talk to an advisor about other higher return investments that you can hold in your TFSA.

3. Withdrawing cash to set up a new TFSA

If you’re changing financial institutions, it’s a good idea to pay particular attention to your TFSA. Why? Because moving cash from an existing TFSA to a new one could affect your contribution room. If you make a withdrawal, you can’t recontribute until the following January 1.

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. That entire deposit would count as a new contribution for the year. And it could trigger an over-contribution penalty.

The solution? See if your new financial institution can make a direct transfer on your behalf.

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, what you’ve missed out on is 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. 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. TFSAs make a great companion to other investment tools, like RRSPs.

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