How the TFSA works

The TFSA is an all-purpose account. Unlike other registered accounts that are dedicated to specific purposes, like saving for retirement with an RRSP or for post-secondary education with an RESP, you can spend the money inside your TFSA whenever and however you want.

As the name implies, all forms of income—meaning any interest, dividends, or capital gains—earned from investments within the Tax-Free Savings Account aren’t taxed. Despite the name including the term “savings account,” your TFSA is actually a powerful investment tool. You can open a variety of different investment vehicles under the TFSA umbrella, including mutual funds, GICs, robo-advisors, or self-directed brokerage accounts (see our picks for best robo-advisors and best online brokers to get started).

Since these typically offer a higher return than traditional savings accounts, investing in your TFSA is the best way to maximize its tax-advantaged power.

Contributing to your TFSA

There are two contribution limits you need to keep your eye on when it comes to contributing to your TFSA: the annual contribution limit and your lifetime contribution limit. If you over-contribute to your TFSA, you will need to pay a fee of 1% of the over-contribution amount per month until you withdraw it. The CRA does monitor your TFSA contributions and withdrawals, so they will enforce the over-contribution penalty if you put too much money in your TFSA.

Annual contribution limit

Everyone over the age of 18 receives the same amount of annual TFSA contribution room each year, and the amount has ranged from $5,000 in 2009 to as high as $10,000 in 2015. For 2023, the annual contribution limit is $6,500. Knowing the historical annual contribution limits since you turned 18 is important for calculating your lifetime contribution limit!

TFSA contribution limits
Year Annual TFSA Contribution Limit Cumulative TFSA Contribution Limit
2009 $5,000 $5,000
2010 $5,000 $10,000
2011 $5,000 $15,000
2012 $5,000 $20,000
2013 $5,500 $25,500
2014 $5,500 $31,000
2015 $10,000 $41,000
2016 $5,500 $46,500
2017 $5,500 $52,000
2018 $5,500 $57,500
2019 $6,000 $63,500
2020 $6,000 $69,500
2021 $6,000 $75,500
2022 $6,000 $81,500

Lifetime contribution limit

You are entitled to all the TFSA contribution room that has accumulated since you turned 18. In other words, if you turned 18 before this year and are opening a TFSA for the first time, you can contribute more to your TFSA than this year’s annual contribution limit in order to “catch up” on the years you missed. Likewise, if you make a withdrawal from your TFSA, you get that contribution room back the following year.

For example, let’s say you are 22 years old and have never opened a TFSA. You turned 18 in 2016, which means you’re entitled to the combined contribution room for each year between 2016–2022.

  • Years 2016–2018 each had a maximum contribution limit of $5,500
  • Years 2019–2022 each had a maximum contribution limit of $6,000

The combined contribution limit for all these years is $40,500. Because you have not used a TFSA before, you could contribute this full amount without penalty in 2023.

The lifetime contribution room of the TFSA in 2023 is $88,000 for anyone who was age 18 or older in 2009. However, because the TFSA allows for your investments to grow tax-free, it is possible for people to have many thousands of dollars more than that in their TFSA thanks to interest, dividends, and capital gains.

Withdrawing from your TFSA

Withdrawing from your TFSA is as easy as contributing to it: You simply take the money out. You do not have to fill out any forms or make any special arrangements to withdraw from your TFSA. However, you do have to be conscious of how your withdrawals affect your contribution limits that same year.

When you make a withdrawal from your TFSA, you do not get that contribution room back until the following calendar year. For example, if your TFSA is maxed out and you withdraw $2,000 in June to go on a vacation, you cannot make any further contributions to your TFSA until January 1. At that point, your $2,000 withdrawal will be returned to you as additional contribution room for that year.

Because the investment gains within your TFSA are tax free, they are also not counted as taxable income and become part of the contribution room you accrue when you make a withdrawal. For example, if you invested $5,000 into your TFSA brokerage account and earned $250 in capital gains, you’d have $5,250 in your TFSA. You could withdraw this full $5,250 completely tax-free. You would then get $5,250 added back to your contribution room the following calendar year.

The TFSA vs. the RRSP

Choosing between the TFSA or the RRSP has led to many a headache. Ideally, you should have both a TFSA and an RRSP, but if you must choose, the TFSA is usually the winner.

The reason the TFSA is more powerful than the RRSP is simply because tax-free income is always better than tax-deferred income. While the RRSP is a fantastic long-term wealth-building tool, income earned from an RRSP in the form of interest, dividends, and capital gains will eventually be subject to income taxes when you make a withdrawal in retirement.

More: Everything You Need to Know About Tax Returns in Canada

Where to find a TFSA

Aside from a traditional bank, there are a few options for where you can find and open a TFSA account.

Online banks

Don’t settle for just going into your usual bank to set up a TFSA. While using a traditional bank is a viable option, you’ll likely be getting a very low interest rate. Earn as much interest as you can and make those tax-free gains really count by looking into rates offered by popular digital banks. To compete with Canada’s Big Five, these financial institutions offer interest rates that are significantly higher than traditional banks.

Take a look at EQ Bank or Oaken Financial (offered through registered GICs). TFSA accounts at online banks work exactly like a TFSA account at a regular bank and are an ideal option if you’re comfortable banking digitally.

Online brokers

Those who are not planning to withdraw from their TFSA for at least 10 years are advised to hold investments in it rather than cash, as over time investments can potentially earn back at a far higher rate than the more minimal interest offered by cash TFSAs. Though you do risk losing money temporarily if the stock market tanks (a risk you don’t run by holding cash in a TFSA), you will likely earn much more rewarding returns over time, provided your investments are diversified.

If you’re comfortable buying and selling your own investments you can open an account with a self-directed online broker, like Questrade which is one of the most affordable online brokers for trading both US and Canadian stocks and ETFs.

Another option is Wealthsimple Trade, which lets you buy and sell stocks and ETFs for free. That said, it only supports deposits in CAD, so it’s best for those who primarily plan to buy and sell Canadian rather than foreign securities.

Robo advisors

Even if you’re not an experienced investor and the notion of opening an investment TFSA intimidates you, you have the option of using a robo-advisor like Questwealth Portfolios (which is the robo-advisor arm of Questrade) or Wealthsimple Invest. These types of automated investing platforms set up custom portfolios to match your investment goals and then manage and periodically rebalance the portfolio on your behalf.

How to make the most of your TFSA

Your Tax-Free Savings Account is best used to set money aside for retirement. While you may be tempted to use your TFSA for things like saving for a vacation, it’s a waste of the account’s potential. Furthermore, your TFSA works best as an investment account and not a savings account, so I advise those who open a TFSA to set it up with a robo-advisor or self-directed brokerage. Finally, be very mindful of your annual and lifetime contribution limits so you don’t go over. You don’t want to spend any of that tax-free income on fees!

Related articles:

Bridget Casey is the award-winning entrepreneur behind Money After Graduation, a Canadian financial literacy website aimed at 20 and 30-somethings. She holds a BSc. from the University of Alberta, and an MBA in Finance from the University of Calgary. She has been featured as a millennial financial expert by Yahoo! Finance, TIME Magazine, Business Insider, CBC and BNN. Bridget was recognized as one of Alberta's Top Young Innovators in 2016.

Explore the latest articles

How to recession-proof your investments

While many may be worried about mortgage payments and inflation, aspiring and experienced investors might be wondering how to navigate the market.

James Battiston Content Specialist


The content provided on is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter. Advertisers are not responsible for the content of this site, including any editorials or reviews that may appear on this site. For complete and current information on any advertiser product, please visit their website.