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What Is a TFSA and How Does It Work?

The TFSA (Tax-Free Savings Account) program was started in 2009. It provided individuals over the age of 18 with a valid social insurance number to set tax-free money aside throughout their lifetime.

According to the Canada Revenue Agency, any contributions towards a TFSA are not tax-deductible. However, any contributions or income earned in the form of interests, dividends, and capital gains are tax-free on withdrawal.

How much is the TFSA limit for 2020?

You can allocate funds each year in your TFSA up to your contribution room. In case you exceed the TFSA contribution limit you will have to pay a tax to the Canada Revenue Agency.

In short, the maximum amount you can contribute to this registered account is known as your TFSA contribution room. For 2020, the maximum TFSA contribution room stands at $6,000. For Canadians contributing towards the TFSA since 2009, the cumulative room is $69,500.

The TFSA contribution is determined by adding:

  • Your TFSA dollar limit
  • Any withdrawals made from your TFSA in the previous years
  • Any unused TFSA contribution room in the previous years and

The CRA also states that the withdrawals will be added to your TFSA at the beginning of the following year. Further, you can withdraw the amount from your TFSA at any time. This means if you are looking to replace TFSA withdrawals in the current year, you can only do so if you have some TFSA contribution room available.

For example, Hannah opened a TFSA in 2009 and made maximum contributions to the account each year. This means she accumulated $63,500 in her account by the end of 2019. At the start of 2020, she contributes another $6,000 which is the maximum contribution room allowed.

In February she withdraws $3,000 for a trip. Unfortunately, the COVID-19 pandemic struck and force her to delay the travel plan. As Hannah has already reached her TFSA contribution limit for the year, she will have to wait until the start of 2021 to do so. So, if the TFSA contribution limit for 2021 is also $6,000 Hannah can contribute up to $9,000 at the start of 2021.

Types of permitted investments in the TFSA

The types of investments allowed in a TFSA are similar to those permitted in a Registered Retirement Savings Plan (RRSP). These investments include cash, bonds, guaranteed investment certificates, shares of certain small business corporations, and securities listed on a designated stock exchange.

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