Tax-Free Savings Account - TFSA

AAA

DEFINITION of 'Tax-Free Savings Account - TFSA'

An account that does not charge taxes on any contributions, interest earned, dividends or capital gains, and can be withdrawn tax free. Tax-free savings accounts were introduced in Canada in 2009 with a limit of $5,000 per year, which is indexed for subsequent years. In 2013, the contribution limit was increased to $5,500 annually The contributions are not tax deductible and any unused room can be carried forward. This savings account is available to individuals aged 18 and older and can be used for any purpose.

INVESTOPEDIA EXPLAINS 'Tax-Free Savings Account - TFSA'

The benefits of a TFSA come from the exemption of taxation on any earned income from the investment. To illustrate this, let's take two savers: Joe and Jane. Joe puts his money in a investment making him 7% per year; Jane does the same but within a TFSA.

If both Jane and Joe make a $5,000 lump sum investment, they will each have $5,350 at the end of the year. Jane will be able withdraw all $5,350 without penalty, whereas Joe would be taxed on the $350 he earned.

A registered retirement savings account (RRSP) is for retirement, while a TFSA can be used to save for anything else. The tax-free savings account differs from a registered retirement account in two main ways:

1. Deposits in a registered retirement plan are deducted from your taxable income. Deposits into a TFSA are not tax deductible.2. Withdrawals from a retirement plan will be fully taxed according to that year's income. Withdrawals from a TFSA are not taxed.

The TSFA addresses some of the flaws that many believe exist in the RRSP program, including the ability to return withdrawals to a TFSA at a later date without reducing unused contribution room.

RELATED TERMS
  1. Tax-Deferred Savings Plan

    A savings plan or account that is registered with the government ...
  2. Health Savings Account - HSA

    An account created for individuals who are covered under high-deductible ...
  3. Registered Pension Plan - RPP

    A form of a trust that provides pension benefits for an employee ...
  4. Savings

    According to Keynesian economics, the amount left over when the ...
  5. Capital Gain

    1. An increase in the value of a capital asset (investment or ...
  6. Canada Revenue Agency - CRA

    A federal agency that collects taxes and administers tax laws ...
RELATED FAQS
  1. What are the differences between a Registered Retirement Savings Plan (RRSP) and ...

    The Registered Retirement Savings Plan and Tax Free Savings Account are both designed to encourage Canadians to save money ... Read Full Answer >>
  2. How is a Registered Retirement Income Fund (RRIF) taxed?

    Tax deferral is the primary benefit of a Registered Retirement Income Fund. The Government of Canada allows citizens to register ... Read Full Answer >>
  3. What are the main reasons not to get a Registered Retirement Savings Plan (RRSP)?

    It is almost always a good idea to save for retirement, and the most popular retirement savings vehicle is the Registered ... Read Full Answer >>
  4. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  5. How does the trust maker transfer funds into a revocable trust?

    Once a revocable trust is created, a trust maker transfers funds or property into the trust by including them in a list with ... Read Full Answer >>
  6. How do gains from my 401(k) figure into my taxable income?

    Capital gains from a 401(k) account figure into taxable income in that capital gains are taxed at the ordinary income rate ... Read Full Answer >>
Related Articles
  1. Savings

    Tax-Saving Tips For Canadian Taxpayers

    Find out how to get a bigger return.
  2. Budgeting

    The Beauty Of Budgeting

    Make it to the end of the month, before you run out of money.
  3. Professionals

    Advisors: How To Help Young Clients Plan For The Future

    Making high-risk investments isn't always the best course. Learn what other factors advisors should consider.
  4. Retirement

    Tax Breaks For Canadian Families

    Canadians have a lot of advantages when it comes to family tax perks.
  5. Taxes

    Registered Retirement Savings Plans (RRSP)

    Learn how the Canadian government makes saving for your post-work years easy. We take you from your first contribution to your first withdrawal.
  6. Professionals

    Is Your Financial Advisor Looking Out for You?

    Financial advisors sometimes aren't looking out for clients' best interests. Regulators are scrutinizing their practices; investors should too.
  7. Professionals

    How Advisors Can Help Expectant Couples

    Bringing a child into the world makes parents more acutely aware of their finances. Here's how advisors can help expectant couples prepare.
  8. Investing Basics

    Got Dividends? Here's How to Reinvest Them

    Reinvesting dividends is almost always a good idea if you intend to hold your shares for the long term, and there are several ways to do it.
  9. Taxes

    Top Tax Tips to Deduct Investment Management Fees

    Investment expenses can be deducted by those who meet three main criteria. Here's what they are and how they work.
  10. Retirement

    Why Millennials Should Invest in a Roth IRA

    Saving for retirement is important, and it's important to start early. A Roth IRA is a great option for low-earners just entering the workforce.

You May Also Like

Hot Definitions
  1. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  2. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  3. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  4. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  5. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  6. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!