Great things you can do with your TFSA

By Mark Seed, myownadvisor

Special to Financial Independence Hub

A Tax Free Savings Account (TFSA) is far more versatile and powerful than you might think.

Now that we’re into the start of a new year (Happy New Year!) here are some great things you can do with your TFSA.

TFSA Backgrounder

The TFSA was first introduced in the 2008 federal budget.

It became available to Canadians for the 2009 calendar year – as of January 1, 2009. Launched part-way through The Great Recession (where markets collapsed significantly during 2008 triggered by a financial crisis), the account was designed as a savings account (hence the name) to encourage Canadians to save more money.

But the “savings” word in the name is very misleading, no?

Correct. 

Since account introduction in 2009, adult Canadians have had a tremendous opportunity to save and grow their wealth tax-free like never before.

While this account is similar to a Registered Retirement Savings Plan (RRSP) there are some notable differences.

As with an RRSP, the TFSA is intended to help Canadians save money and plan for future expenses. The contributions you make to this tax-free account are with after-tax dollars and withdrawals are tax-free. Consider it like an RRSP account in reverse.

For savvy investors who open and use a self-directed TFSA for their investments, these investors can realize significant gains within this account. This means one of the best things about the TFSA is that there is no tax on investment income, including capital gains!

How good is that?!

Let me tell you … here is summary of many great account benefits:

1. Capital gains and other investment income earned inside the account are not taxed.
2. Withdrawals from the account are tax-free.
3. Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, like future Old Age Security (OAS) income.
4. Anything you withdraw can be re-contributed in a following year, in addition to that year’s contribution limit.
5. While you cannot contribute directly as you could with an RRSP, you can give your spouse or common law partner money to put into their TFSA. Do it without any income attribution!
6. TFSA assets could be transferable to the TFSA of a spouse or common-law partner upon death. More details below for you.
7. The annual contribution limit is indexed to inflation in $500 increments, that happened in recent years …. and more!

I’ve got my preference for which account I focus on for wealth-building purposes (related to the RRSP vs. TFSA debate, including what account I would suggest you max out your contributions to first) but let’s compare each first:

Based on my personal investment plan, I feel the TFSA ultimately trumps the RRSP as a retirement vehicle to focus on first at any income level even though I contribute to both every year. All the money in the TFSA is mine to keep, grow and manage with no taxation withdrawal consequences.

Since inception, here are the annual and cumulative limits assuming no withdrawals over that period were made:

TFSA contribution limit 2009 to 2025:

Pretty impressive tax-free money!!

Q&A with Mark – What has worked for me/us over the years?

Well, we’ve bought various assets, namely Canadian stocks and ETFs over the years.

To date, we have avoided any TFSA withdrawals. Instead, like I referenced above, we use our TFSAs for owning equities and wealth-building purposes.

Q&A with Mark – What types of investments can you own inside the TFSA?

Thankfully lots!

Similar to the assets you can hold within a Registered Retirement Savings Plan (RRSP), the TFSA can also be used to help Canadians build significant wealth beyond just holding cash savings. You can own a number of different types of investments inside the TFSA:

• Cash
• Guaranteed Investment Certificates (GICs)
• Bond funds or bond ETFs
• Individual stocks
• Equity funds or equity ETFs

What do we own inside our TFSA? What do some of my readers own inside their TFSAs? Here is that post:

So, if you haven’t already thought about it, here are those great things you can do with your TFSA:

1. Save for your kids’ education

If you’ve already saved for kids’ education using a Registered Education Savings Plan (RESP) then you should know your TFSA is a great place to save even more for your kids’ education. As you know from my list above, you’ll have zero taxes on the growth within the plan and there will be no tax consequences with this account if your children choose not to go to college or university: like the RESP has.

When your kids become adults, encourage them to open a TFSA in their own name. This way they can start saving and investing tax-free as long and as much as possible.

2. Save for your short-term goals

Want to buy a new(er) PHEV or other car like we did in 2024?

Want to travel?

Want to fund some improvements in your home without going into debt?

Do it with tax-free money using your TFSA to park savings or grow savings for shorter-term expenses.

3. Fund your retirement

You may have guessed it, but this is my favourite.

My wife and I have been diligently using both TFSAs as a secondary retirement account along with our RRSP – since TFSA Day 1.

Although we’re not ready to fully retire yet, the TFSA will help us retire eventually.

Contributions to the TFSA make it the best great retirement account due to the types of investments you can hold inside this account coupled with tax-free growth: consider a bias to stocks or ETFs that hold global stocks for growth whenever in doubt. 

I list those best of the best ETFs on this dedicated page:

Here are some options to consider when using the TFSA related to retirement income planning:

• If you have already reached your RRSP contribution limit:  you may use your TFSA next. What I mean is, you can consider making RRSP contributions throughout the year and then using the RRSP-generated tax refund to contribute to your TFSA every spring.  This way, you can grow both accounts over time!
• If you want to retire early or at least semi-retire like we plan to do in our early 50s … you may not be eligible to receive any workplace pension income or government benefits yet. You can consider using your TFSA assets to bridge the gap between early retirement and when those pension income streams start: making tax-free income withdrawals.
• If you have already reached retirement age (i.e., age 65 or so) and you’re already drawing a government or workplace pension, consider contributing to a TFSA: so you can be more tax-efficient in retirement. For example, most of you know you can’t own an RRSP past the year you turn age 71. (You have to convert it to a Registered Retirement Income Fund (RRIF) or payout annuity by the end of the year you turn 71, or take the RRSP money in cash (and pay tax on it)). Regardless of your age – you can keep your TFSA open – and keep contributing to it without any age restrictions. So, take some monies withdrawn from your RRSP or RRIF each year and put that money to work tax-free inside your TFSA. This means you are converting tax-deferred money into tax-free money to fight longevity risk.

4. Save for future, elder care or family-related costs

Who knows what the future holds.

This means beyond a general savings account a TFSA can be a great way to invest (and grow) money tax-free for future needs.

For example, say you have aging parents. If you’re not sure about their long-term healthcare costs, you can use your TFSA — or give your parents money to contribute to their TFSAs – to help cover future expenses.

5. Save for your own rainy day

Financial challenges happen from time to time. This means if you lose your job and your family income is compromised TFSA assets can help you and your family navigate any rainy day disaster with money already in your bank account.

Here are some other Q&As related to the TFSA you should know about!

Q1: Do you need earned income to contribute to a TFSA?

No. In fact, you can have your parents, spouse, partner, grandparent or other family member gift you money for your TFSA every year. Just ask them! 🙂 Again, you need to be 18 years of age or older to own an account.

Q2: Is there a deadline for TFSA contributions?

No. There is no deadline for a TFSA contribution. You just get more TFSA contribution room every year!

Q3: Where can I find out how much TFSA contribution room I have?

You can confirm your TFSA contribution room by contacting the Canada Revenue Agency (CRA). You can find it online if you are registered for CRA’s “My Account” services.

For more information, see “Where can I find my TFSA contribution room information?” at canada.ca.

I would also suggest you keep track of your own TFSA contributions – this way, if there is an issue or a discrepancy, you can discuss it with CRA or your financial institution.

Q4: What happens if I over-contribute? Is there a penalty?

Yes. CRA assesses penalties for over-contributions at a rate of 1% per month on the excess contribution.

Q5: Do investment gains in my TFSA affect my contribution room?

No. Investment income earned inside the account do not affect your TFSA contribution room. This means, if you invest wisely over time, you can potentially build significant wealth. Again, based on investing discipline I know some individuals that have over $200,000 in their TFSAs. I also know some couples who have their combined TFSA assets worth more than $400,000 in value, and growing …

Q6: Can I make withdrawas from my TFSA? What happens?

Again, TFSA withdrawals are tax-free, and you can use the money for any purpose.

As you have learned above, a nice feature is that amounts you withdraw from your TFSA can be simply replaced in a future tax year. The amount you withdrew (including gains you might have) will be added to your contribution room.

Q7: Can I have more than one TFSA?

For sure. But, you don’t get more personal contribution room. I would suggest keeping things very simple and just open one TFSA self-directed account.

The challenge with more than one TFSA is you’ll complicate your life by tracking your contributions and withdrawals. If you lose track, it’s a headache to fact-find. If you over-contribute, you’ll pay a penalty to CRA.

So, open one self-directed TFSA, focus on equities for wealth-building if you can, and run with that. 

Q8: When I die, will my TFSA be taxed?

Well, if you name your spouse as the beneficiary without a “successor holder” designation — or if you name any other person or the estate as the beneficiary — the TFSA earnings from your date of death to when the estate is settled could be taxable.

Instead, consider naming an account “successor holder” designation. We set that up years ago…

As a TFSA successor holder – who can only be your spouse or partner:

• the deceased’s TFSA value is not included in their date of death/final income tax return;
• the successor holder will become the new holder of the TFSA immediately upon the deceased’s death;
• the successor holder will receive your TFSA assets, i.e. all earned income/assets up to the date of death sheltered within a TFSA account;
• all of the earned income after the date of death will remain sheltered within the TFSA (a HUGE benefit);
• after taking over ownership of the deceased’s TFSA, the successor holder can transfer all or a portion of the deceased’s TFSA account into their own existing TFSA account without impacting their TFSA contribution room; and
• after taking over ownership of the deceased’s TFSA, the successor holder can make tax-free withdrawals and make new contributions subject to their own unused TFSA contribution room limits.

That’s different than a TFSA beneficiary.

As a TFSA beneficiary:

• the beneficiary will receive the fair market value of the deceased’s TFSA account free of any income taxes;
• all of the income earned and increase in the TFSA assets values between the date of death and the date of the transfer to the beneficiary is taxable income and must be included in the beneficiary’s income tax return (a major drawback for spouses and common-law partners compared to the option above);
• beneficiaries can contribute a portion or all of the deceased’s TFSA assets up to the limit of their own unused TFSA contribution room; and
• if no beneficiary or successor holder is designated in the TFSA documents or in the deceased’s will, the TFSA assets will be paid to the deceased’s estate and disposed of in accordance with their will.

Again, consider some estate planning with your TFSA. It could be the last account you tap for tax-free income later in life after your RRSP/RRIF assets are gone and spent. You’ll read more about that in the articles below since the RRSP/RRIF is a tax liability. Best to get money out while you can in early retirement if you have other income streams.

More reading on this subject can be found here.

Great things you can do with your TFSA summary

There are many great things you can do with your TFSA, in any investing year. Inside our TFSAs we:

• max out contributions to this account, every year, and will do so again in 2025,
• we tend to buy and own only equities inside our TFSAs for long-term growth,
• we own dividend paying stocks for ever growing income, and
• we own some ETFs for extra diversification.

What have we been buying inside our TFSAs?

My link above shared we’ve been buying more units of low-cost ETF XAW in recent years, since I already have a pretty robust basket of Canadian dividend paying stocks inside my RRSP and my taxable account.

XAW allows me to diversify away from Canada very easily. That trend is going to continue into 2025 and likely beyond.

In using this approach, it is my hope that our combined TFSA assets could be worth close to $500k in the coming years, as all TFSA equity assets continue to compound away uninterrupted.

With that type of wealth-building power on your side, I hope you consider investing inside your TFSA in the coming years too.

Your future self will thank you!

Thanks for reading and sharing and let me know if you have any questions on this updated post.

Mark

Mark Seed is a passionate DIY investor who lives in Ottawa.  He invests in Canadian and U.S. dividend paying stocks and low-cost Exchange Traded Funds on his quest to own a $1 million portfolio for an early retirement. You can follow Mark’s insights and perspectives on investing, and much more, by visiting My Own Advisor. This blog originally appeared on his site on Jan. 2, 2025 and is republished on Findependence Hub with his permission.