Find out your current tax-free savings account (TFSA) contribution limit by using this calculator.
TFSA is a bit of a misnomer. While you can use it for straightforward savings, think of it more accurately as an investment holding account to store things like exchange-traded funds (ETFs), guaranteed investment certificates (GICs), bonds, stocks and, yes, plain-old cash. While you do have to abide by the set amount of contribution room each year, any gains you earn on those investments will not affect your contribution room for the current year or years to come. Plus, the income earned is tax-free (more on that below). Any resident of Canada who is 18 or older and has a valid social insurance number can open a TFSA.
Is a TFSA really tax free?
TFSA contributions won’t reduce your taxable income, unlike registered retirement savings plan (RRSP) contributions. (If you haven’t maxed out your RRSP, get on that before the deadline). However, where you do save on taxes with a TFSA is that the money you earn inside your TFSA is not taxable. That means income from things like interest, stock dividends or capital gains aren’t subject to income tax. Any income earned in the account—even when it is withdrawn—is generally tax-free. (TFSA vs RRSP: How to decide between the two.)
Compare the Best TFSA Rates in Canada >
How does TFSA contribution room work?
Your TFSA contribution room is the maximum amount you can contribute to your TFSA for any given year. Your contribution room and your age affect the amount of contribution room you have. You begin accumulating from the year you turn 18 (and are a resident of Canada), even if you didn’t file income tax that year or open a TFSA yet.
Your contribution room is the total amount of the following:
- The TFSA dollar limit for the current year
- Any contribution room you have leftover from previous years
- Any withdrawals made from your TFSA in the previous year
The TFSA contribution limit for 2023 is $6,500. If you turned 18 before the year 2009, your maximum lifetime TFSA contribution limit is $88,000. If you take money out of your TFSA, you get that room back on January 1 the following year. Just don’t go over your limit.
What happens if you over-contribute to your TFSA?
If you exceed your contribution limit, you’ll be subject to a 1% penalty tax per month for each month the excess amount remains in your account. Luckily, this 1% tax only applies to the amount that’s been over-contributed.