No tax deductions: The biggest drawback of a TFSA, is that your contributions are made with after-tax dollars and are not tax deductible, unlike the FHSA and RRSP. Contribution limits: Though there is no lifetime maximum contribution limit, there is an annual contribution limit, stipulated by the Government of Canada.
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.
Yes, you can lose money on a TFSA, but it is easy to avoid losing your money. Typically, people who lose their money on a Tax-Free Savings Account are people who are using it for more volatile investments or people who are over-contributing.
Yes. The assets in your TFSA are like any other investment, and they can lose value over time. You can actually lose contribution room too.
Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn.
The bottom line. Both TFSAs and savings accounts have a place in someone's overall portfolio. Savings accounts are perfect for holding liquid funds such as emergency funds, while TFSA holders can take advantage of tax-free compounding interest to build medium to long-term wealth.
It doesn't take much to have an above-average TFSA. The average value of a tax-free savings account in 2022 is $32,234, according to estimates based on data from Canada Revenue Agency. Total contribution room alone since 2009 introduction of TFSAs amounts to $81,500.
Unfortunately, a TFSA is neither a tax-free nor a tax- deferred account for U.S. tax purposes. Income received or capital gains realized each year must be reported on your U.S. income tax return.
If you max out your TFSA by investing all of your savings into it at once, you may find yourself with a nice stock portfolio but no emergency fund. Additionally, there are certain investment objectives that are better served by keeping some of your assets outside a TFSA than by putting them all in the account.
If you hold a TFSA when you leave Canada, you can keep it and continue to benefit from the exemption from Canadian tax on investment income and withdrawals.
As of January 2, 2009, you are able to start contributing to a TFSA, which can hold any combination of eligible investment vehicles, such as cash, stocks, bonds, GICs and mutual funds, the growth of which will be tax-sheltered.
To avoid these hefty fees, you should instead take advantage of the re-contribution rule: Withdraw the funds from your current TFSA near the end of the calendar year, and in the following year, open a new account at the financial institution of your choosing and recontribute your withdrawal to it.
No tax on earnings: Any income, capital gains and dividends you earn in a TFSA are yours – you won't be taxed on what you earn. No penalties for withdrawals: You can take your money out whenever you need it (subject to the type of investment you've made), which is good if you need access to your money quickly.
It also means that starting on January 1, 2024, eligible Canadians will now have a cumulative lifetime TFSA contribution limit of $95,000 (see “What is the lifetime contribution limit for TFSA?” below for examples and charts).
The TFSA will grow to $101,075 after 25 years at an average annual rate of return of 6.00%. If you make the same investment in a taxable investment, it will grow to $83,669 after 25 years.
Tax-free savings accounts—U.S. tax rules
A non-resident can continue to hold a Canadian tax-free savings account (TFSA) that'll be exempt from Canadian tax on its investment income and withdrawals.
The closest US analogue to the TFSA is the Roth IRA. TFSA assets, however, cannot be transitioned to Roth accounts; rather, the assets need to be liquidated prior to moving south of the border.
A TFSA is similar to a Roth individual retirement account in the United States, although a TFSA has no withdrawal restrictions, such as the unqualified withdrawal penalty of the Roth IRA.
According to Statista, the average retirement income for seniors (65+) in Canada is $32,000 per year. Some retirees may have additional sources of income beyond their retirement plan, such as investments, part-time work, or government benefits like the Canada Pension Plan (CPP).
Canada Pension Plan (CPP)
In retirement, Canadians receive a monthly amount, which is calculated based on how much they contributed and for how long. In 2023, the maximum you can receive per month is $1,306.57, and as of June 2023, the average monthly CPP received (at age 65) for a new retirement pension was $772.71.
I get to that number by looking at recent CRA data that shows 8.9% of all TFSA holders max out their contribution room. Since only about half of all eligible Canadians have any TFSA at all, that means somewhere between 4% and 5% of all eligible Canadians have maxed out TFSAs.
When the last holder of a deposit or an annuity contract TFSA dies, the arrangement ceases to be a TFSA. The FMV of the TFSA at the date of death will be received tax-free by the deceased's estate or other designated beneficiaries. There are no reporting requirements for these amounts.
About TFSAs
Just like its name, it helps you save money, tax free – for as long as you choose. Canadian residents aged 18 (or 19 in some provinces) or older can open a TFSA. Any capital gains or income earned in the account is typically tax-free even when money is withdrawn.