How to make the most out of your TFSA

The Tax-Free Savings Account (TFSA) can be a powerful savings tool and investment vehicle available to all Canadians. Financial contributor Christopher Liew explains how TFSAs can help you reach your financial goals faster (Getty Images / Andrii Yalanskyi)

Are you leaving money on the table with your TFSA?

The Tax-Free Savings Account (TFSA) is a powerful savings tool and investment vehicle available to all Canadians. It offers tax-free growth on investments as well as tax-free withdrawals.

That said, many people are leaving money on the table by using their TFSA as a simple savings account. Below, I’ll explain a bit more about how TFSAs work and how to take full advantage of them, so you can reach your financial goals faster.

TFSA basics

During the recession, TFSAs were introduced in 2009 as a way to encourage Canadians to save more money with a tax-advantaged account.

Don’t let the name fool you, though. TFSAs aren’t just a substitute for a traditional savings account. They can also be used as investment vehicles to hold stocks, bonds, GICs, and other long-term investments. Just be sure not to day trade with your TFSA.

Every year, the CRA sets an annual TFSA contribution limit, thereby increasing the total lifetime contribution limit.

Although contributions to TFSAs are made with post-tax money, the money can grow in your TFSA without being subject to taxes. Most importantly, the money can be withdrawn at any time, and you’ll never have to pay a dollar of tax on it.

Tips to make the most out of your TFSA

Are you ready to start saving more money and paying less taxes on your investments? Use these TFSA management tips if you want to take full advantage of your TFSA and use it as more than just a savings account.

1. Maximize annual and lifetime contributions

If you’ve been eligible for a TFSA since it started in 2009, then your total lifetime contribution limit in 2024 is $95,000.

To be eligible for a TFSA, you must be a Canadian resident who’s 18 years old. If you turned 18 after 2009, then your lifetime contribution limit would be less than $95,000 and would depend on the annual contribution limits that have accumulated since you first became eligible.

If it’s a bit confusing, don’t worry. The CRA has a full guide on how to determine your contribution room.

Once you determine how much contribution room you have, you should do your best to maximize it. The more funds you have in your TFSA, the more you’ll be able to take advantage of compounding interest, allowing you to earn more tax-free money.

Another important thing to note is that your annual contribution room from previous years can be rolled into the current year, as long as you don’t surpass your lifetime contribution limit.

2. Invest in ETFs

Your TFSA can be an excellent investment vehicle. One of the best investments you can make is into an Exchange-Traded Fund (ETF). An ETF is essentially a portfolio that includes multiple investments, which spreads the risk of the investment without you having to manually research and invest in individual stocks on your own.

Time-tested ETFs that track indexes like the S&P 500 will likely return far more to you in the long run than from a typical savings account.

3. Purchase GICs

Guaranteed Investment Contracts (GICs) are another excellent addition to your TFSA. When you purchase a GIC, you’re essentially lending money to the bank for a set period of time. In exchange, the bank offers to pay back the money at the end of the term with a set amount of interest.

GIC interest rates currently range between 3 and 5 percent. The upside of GICs is that the return is guaranteed and isn’t subject to market fluctuations.

The downside is that your money is essentially locked up for the entire term, which could range from as short as a few months to a decade.

4. Don’t over-contribute to your TFSA

If you’re approaching your lifetime contribution limit, I recommend doing a review of your TFSA account to make sure that you don’t accidentally over-contribute it.

Any amount held in your TFSA over your contribution limit is subject to a monthly 1 per cent penalty by the CRA.

For example, if you’ve overcontributed by $1,000, you’ll be penalized $10 per month until the excess is taken out.

TFSA vs RRSP: what’s better for retirement?

The Registered Retirement Savings Plan (RRSP) is one of the most common retirement savings and pension plans. However, relying solely on an RRSP/RRIF for your retirement income could have unintended consequences, resulting in you paying more taxes and could potentially make you ineligible for government retirement benefits.

While RRSPs are a good tool to incorporate into your retirement plan, I recommend people to maximize their TFSA contributions before contributing to their RRSP, as TFSAs offer greater long-term tax benefits. TFSA withdrawals also won’t affect your eligibility for Old Age Security (OAS) or the Canada Pension Plan (CPP).

Want to learn more? Keep reading for a more detailed comparison of the TFSA vs RRSP.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers at Blueprint Financial