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Published February 23, 2023

Tax-Free Savings Account: What To Know

Since tax is not applied to interest and investment income inside a Tax-Free Savings Account (TFSA), you can grow your money faster. Contribute up to $6,500 in 2023.

The federal government introduced Tax-Free Savings Accounts in 2009. This type of bank account quickly became popular with investors since it was a savings vehicle that allowed people to tax-shelter their money. More than half of Canadians (63%) have a tax-free savings account, according to BMO’s 2022 annual savings study.

The name “tax-free savings account” can be a bit confusing though, and many people still don’t understand how contribution limits and withdrawal rules work for these accounts. Knowing more about these registered accounts can help you maximize their financial benefits.

What is a tax-free savings account?

A tax-free savings account, or TFSA, is a registered plan that allows Canadian adults with a valid Social Insurance Number (SIN) to save a certain amount of money each year without paying taxes on the earnings. The average TFSA holds $34,917, according to the 2022 BMO savings study.

Despite the name, TFSAs are for more than just savings — although only about half of Canadians (49%) know this, according to the BMO study. Tax-free savings accounts can also be used to hold investments, like mutual funds and guaranteed investment certificates. All of your savings and investments are entirely tax-free when held in a TFSA.

A TFSA is similar to other registered plans, such as a Registered Retirement Savings Plan, or RRSP. The main difference with a TFSA is that you don’t pay any capital gains tax to the Canada Revenue Agency when money is withdrawn.

What you do with your TFSA is up to you. Some people use it for short-term savings, such as an emergency fund or a down payment. Others use it for longer-term goals like retirement savings or investing in the stock market.

What can I invest in with a TFSA?

There are numerous options for those who want to invest through their TFSA, including:

  • Stocks.
  • Bonds.
  • Mutual funds.
  • Guaranteed investment certificates.

Although you don’t get a tax break when you contribute, you won’t pay any taxes on capital gains.

Despite the ability to invest through a tax-free savings account, the most popular TFSA asset is cash — 56% of Canadians hold cash in their TFSAs, according to BMO’s annual savings study conducted in 2021.


Over half of Canadians (64%) say they know what makes RRSPs and TFSAs unique, according to the 2021 BMO savings study. Knowing what sets these accounts apart can help you determine how to best utilize each one.

Both RRSPs and TFSAs are government-registered accounts designed to help you save and invest. And they both offer tax benefits — but the nuance of how these benefits work is what differentiates RRSPs and TFSAs.

TFSA key takeaways:

  • Contributions to TFSAs earn interest like a regular savings account.
  • TFSA contributions may also grow if you invest through your account and your investments perform well.
  • You don’t need to pay taxes on earned interest or investment gains in a TFSA.

RRSP key takeways:

  • RRSP contributions are tax deductible, which means you can deduct RRSP contributions from your annual income when you file your taxes.
  • Interest and investment gains withdrawn from an RRSP are subject to tax.

The best place to stash your cash will depend on your financial situation and goals. The good news is that you don’t need to select a TFSA over an RRSP (or vice versa) — you can have both.

EligibilityCanadians 18 or older with a valid Social Insurance Number (SIN)Anyone who earns income and pays taxes
2023 contribution limit$6,50018% of your income, up to $30,780
Contributions tax-deductible?NoYes
Tax-free withdrawals?YesNo

TFSAs vs savings accounts

Savings accounts hold cash, while tax-free savings accounts are capable of holding cash and investments. Similar names aside, there are a couple of other fundamental differences to take note of.

  • Tax benefits. TFSAs offer tax-free interest and investment gains. Regular savings accounts don’t.
  • Contribution limits. TFSAs have annual contribution limits, while regular savings accounts don’t limit how much you can deposit.

What’s the bottom line? Both savings accounts and TFSAs hold cash and earn interest, but TFSAs offer unique tax advantages and are equipped to invest.

Tax-free savings account interest rates

Like standard savings accounts, TFSAs earn interest — though rates are variable and are subject to change. The average rate for a TFSA is 1.77% at the time of this writing, according to NerdWallet analysis.

Some TFSAs have interest rates as high as 3.65%, though these are often offered by digital banks or online divisions of in-person banks and credit unions.

How to open a tax-free savings account

Opening a TFSA is easy, as most financial institutions, insurance companies and investment firms offer them. A self-directed TFSA, which allows you to be in total control of the investments you choose, is also an option.

To open a TFSA you’ll need to:

  • Be a resident of Canada.
  • Be 18 years or older, or the age of majority in your province.
  • Have a valid SIN.

The age rule is based on your actual birthday, not the calendar year. Let’s say you’re turning 18 on November 1, 2023. You’d be able to open a TFSA and contribute the full amount for the year ($6,500) on that date.

In Newfoundland and Labrador, New Brunswick, Nova Scotia, British Columbia, Northwest Territories, Yukon and Nunavut, the age of majority is 19. That means you may be able to open a TFSA until you turn 19. Fortunately, the contribution room for the year you turned 18 will carry over.

How many TFSAs can one person have?

You’re allowed to have more than one TFSA, but your total contribution room doesn’t change. It’s shared between all of your accounts. Regardless of your goals, a TFSA is just one account that can help you reach them. Understanding the rules is vital, as you’ll be able to use your TFSA to your advantage while avoiding any penalties.

How TFSA contributions work

TFSAs have annual contribution limits.  For 2023, the TFSA contribution limit is $6,500.

The overall amount you can contribute, or contribution room, carries forward from previous years. That means that if you were eligible to contribute in previous years but didn’t have the cash, that unused room gets added to the current year’s room.

As of 2023, the TFSA total contribution limit is $88,000.  If you’ve deposited money in previous years or made withdrawals, you’ll need to factor in those amounts to calculate how much you can deposit into a TFSA.

To find out your actual contribution room for the year, you can use the following formula:

Current year contribution limit + unused contribution room from previous years + withdrawals made in previous years = current available TFSA room.

You can also check your CRA MyAccount for your TFSA room. However, since financial institutions typically only report your contributions once a year, the number displayed in your CRA MyAccount may not be accurate.

What happens if you overcontribute to a TFSA?

Overcontributions to a TFSA are taxed at 1% of the highest excess amount for each month that the excess amount stays in the account.

How TFSA withdrawals work

You can withdraw uninvested cash from your TFSA at any time. Any amount you withdraw from your TFSA is added back to your contribution room on January 1 of the following year.

For example, say you had maxed out your TFSA in August 2022 and then withdrew $10,000 in November. On January 2, 2023, you’d be able to contribute $16,500: your $6,500 contribution for 2023 and $10,000 to make up for your withdrawal.

If you withdraw money from your TFSA, you can deposit it again within the same calendar year so long as you have available contribution room. To continue our example above, let’s say you withdrew $10,000 from your maxed-out TFSA in November 2022. You couldn’t re-contribute the money in December 2023; instead, you’d have to wait for the following year to begin.

If you hold investments in your TFSA, some investment products may have withdrawal restrictions, such as term deposits that have a maturity date. Selling investments in your TFSA to reinvest the available funds doesn’t count as a withdrawal.

How do TFSA transfers work?

Transferring your TFSA from one financial institution to another doesn’t count as a withdrawal. To transfer your TFSA, ask your new financial institution to initiate the transfer. Your old bank may charge a fee to transfer your account, but some financial institutions will cover the cost for you.

Pros and cons of TFSAs

Once you understand how a TFSA works, you’ll quickly realize the benefits. Even though a TFSA can be great for many people, there are still some drawbacks to consider.

Pros of tax-free savings accounts

  • Tax-free earnings. All of your capital gains are tax-free. When it’s time to make a withdrawal, you don’t have to pay the CRA.
  • Easy withdrawals. Withdrawals can be made any time, and you get the contribution room back the following year.
  • Equal contribution room. Regardless of your income, everyone gets the same TFSA contribution room.
  • Flexible. You can purchase different savings and investment products, including bonds, stocks and exchange-traded funds (ETFs), to keep in your TFSA.

Cons of tax-free savings accounts

  • No immediate tax break. Unlike when you make RRSP contributions, you don’t get a tax break when contributing to your TFSA.
  • Complicated rules. Many people don’t understand the TFSA rules, which prevents them from using the account to the maximum potential.
  • Contribution room must be tracked. Since the CRA doesn’t track your contributions and withdrawals in real-time, you need to track things independently. Disorganization could lead to overcontributions and penalties.
  • Day trading isn’t allowed. The CRA considers day trading to be business income, so it’s not allowed in your TFSA.

The best way to use your TFSA effectively is to have a goal in mind for the savings. This strategy allows you to purchase investment products within your TFSA that line up with your goal’s timeline and potential for risk. For example, if you’re saving up a down payment and plan to buy a house in five years, your strategy would be different than if you’re saving for retirement in 30 years.

Frequently asked questions about TFSAs

Can the CRA see my TFSA?

Yes. The Canada Revenue Agency automatically receives an annual TFSA record on your behalf from the bank or credit union that issues your tax-free savings account.

Do you have to claim TFSAs on your income tax return?

No. You typically don’t need to claim anything TFSA-related on your tax return unless you over-contributed or became a non-resident of Canada.

About the Authors

Barry Choi

Barry Choi is a personal finance and travel expert. His website is one of Canada's most trusted sites when it comes to all things related to money and travel.

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Shannon Terrell

Shannon Terrell is a lead writer and spokesperson for NerdWallet, where she writes about a variety of personal finance topics. Previously, she was a writer, editor and video host for…

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