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An account that does not charge taxes on any contributions, interest earned, dividends or capital gains, and can be withdrawn tax free.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. Income Tax

    A tax that governments impose on financial income generated by ...
  3. Savings Account

    A deposit account held at a bank or other financial institution ...
  4. Canada Revenue Agency - CRA

    A federal agency that collects taxes and administers tax laws ...
  5. Capital Gain

    1. An increase in the value of a capital asset (investment or ...
  6. Finance

    The science that describes the management, creation and study ...
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 >>
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. Savings

    Mortgage Faceoff: Bank of America Vs. Wells Fargo

    Which bank offers the better mortgage deal? Here's how they compare on two popular types of mortgage.
  7. Savings

    The Worst Place to Exchange Currency

    Exchanging currency is a necessary part of traveling, but not all currency exchanges are created equal.
  8. Professionals

    Why Auto-Enrollment Will Save Your Retirement

    Savers need all the help they can get, even if it amounts to an offer they can't refuse. That's why the biggest improvement to 401(k)s is auto-enrollment.
  9. Professionals

    Retirement Planning Essentials for Your Clients

    You may have heard these retirement planning tips before, but has your client actually put them into action yet?
  10. Professionals

    Which Robo-Advisor is Right for You?

    Which robo-advisor is right for you? There are many factors to consider, including breadth of services, ease of use and cost.

You May Also Like

Hot Definitions
  1. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  2. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  3. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  4. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  5. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center