There’s a specified limit to how much money you can put inside a TFSA. For 2023, the annual TFSA contribution limit is $6,500, and for 2024, it will be $7,000. As of Jan. 1, 2024, there is a lifetime maximum of $95,000 for those who were 18 or older as of 2009. The good part is that any unused contribution space and any amount that you withdraw from your TFSA becomes available to you as contribution room in the next calendar year.
Even though the word ‘‘savings” is in the name, it’s actually better to think of TFSAs as investment accounts, rather than simply a savings account. You can certainly have a savings account within a TFSA, but the real potential for tax-free earnings is maximized by keeping other kinds of investments inside a TFSA. We’ll go through the options available to you.
What can you hold in a TFSA?
Let’s break down each of the kinds of investments that can be used within a TFSA, see how they differ, and consider what to keep in mind when choosing which one is the best for you and your financial goals.
TFSA savings accounts
These are the most basic types of TFSAs. In order to set up a savings account within a TFSA, you simply have to contact your financial institution and provide your social insurance number along with other identification s to ensure you are an adult Canadian resident for tax purposes. It is also worth shopping around to see which bank or credit union offers the best interest rate on savings accounts. Many will advertise higher rates for the first few months to attract new business.
One big advantage of this kind of TFSA is that it is incredibly easy to set up. If wrapping your head around how to go about investing your money is preventing you from opening a TFSA, then you might as well set up a basic savings account for now. Remember, even if you can only afford to deposit the minimum amount (can be as low as $25), any unused allowable contributions will carry forward to the next year, so the sooner you open your account, the more money you will be able to invest down the road. Even better: arrange for automatic deposits to your TFSA savings account, say, monthly or each time you get paid.
It is also a very safe, almost no-risk, way of squirrelling away money. If you are uncomfortable with the idea of taking any risk whatsoever with your investment principal, this could be a good choice for you. Even high-interest savings accounts, however, have a very low rate of return when compared to other kinds of investments. You would be looking at an interest rate topping out in the 2% range. And beware that some savings accounts offer interest rates even lower than the rate of inflation, so any money you deposit will have less purchasing power in the future when you withdraw it.
TFSA guaranteed investment certificates (GICs)
In a nutshell, guaranteed investment certificates (GICs) guarantee a certain interest rate on a given investment for a specified period of time. A one-year GIC might pay 1%, for example, while a 5-year might pay 2.5%. Traditionally, when you cash out your GIC earnings at the end of the term, you have to pay tax on the interest you’ve earned. But with TSFA GICs, the interest you earn is tax-free. You can open a GIC within a TSFA with most major lenders within Canada, including banks and credit unions.
There are two types of TFSA GICs offered by most banks: cashable/redeemable and non-redeemable. Just the way it sounds, cashable/redeemable GICs offer the flexibility to cash in your investment at any time, while non-redeemable GICs are locked in for the entire fixed term.