The best tax free saving accounts (TFSAs) in Canada

A Tax-Free Savings Account (TFSA) isn’t merely a savings account but a registered investment account that offers tax-shelter benefits from the Government of Canada. You can hold everything from eligible savings accounts and GICs to stocks, bonds, mutual funds, and exchange-traded funds (ETFs) within a TFSA and all the gains you earn won’t be subject to taxes.

There are limits to how much you can contribute to a TFSA that increase every calendar year. As of 2021, the contribution room increased by $6,000.

Additionally, TFSAs are incredibly flexible as you contribute and withdraw money at anytime (or as many times) as you like within a year without penalties or taxes - provided you stay within your contribution limits of course.

There are government-mandated limits to how much money you contribute to your TFSA (aptly known as a TFSA contribution limit). This limit increase with the start of every new calendar year.

In 2021, the contribution limit increased by $6,000. The great thing about TFSAs is that any unused contribution room from previous years carries over.

If you've never contributed to a TFSA before and were at least 18 years old (and a Canadian resident) in 2009 - the year when TFSAs were first launched - your total lifetime contribution limit will be $75,500.

Your lifetime TFSA contribution room begins from when you turned 18, or for newcomers to the country, the year you became a Canadian resident. You can find how much TFSA contribution room you have available online on your CRA My Account profile.

It's also important to know how withdrawals can impact your TFSA contribution limits, as any amount of money you withdraw from your TFSA is temporarily deducted from your contribution room until the start of the next calendar year. Here's an example to help illustrate:

• Let's say you had $20,000 in total TFSA contribution room available in 2020
• If you withdrew $5,000, you would've temporarily lost that contribution room for the year (contribution room would fall from $20,000 to $15,000)
• However, at the start of 2021, you would've regained this $5,000 contribution room you temporarily lost (bringing your TFSA room back to $20,000)
• On a separate note, you would also receive $6,000 in additional contribution room for new deposits (TFSA contribution room increases at the start of each calendar year regardless of withdrawals or deposits made in previous years).

The answer to the TFSA vs. RRSP debate relies heavily on your personal goals, and to an extent, your financial standing. It’s also worth noting you can contribute to both a TFSA and RRSP at the same time.

The advantages of a TFSA is it’s a straightforward tax shelter - helping grow your savings and investments tax-free - while also allowing for flexible anytime withdrawals. This makes TFSAs ideal for general savings and short-to-medium term financial goals as well as for Canadians in lower tax brackets (e.g. anyone earning under $50,000) who may not be in a position to benefit as much from the tax deduction benefits of an RRSP.

Explaining the advantages of a Registered Retirement Savings Plan (RRSP) is slightly more complicated since it offers tax-deferment rather than tax-free withdrawals. Firstly, contributing to your RRSP will reduce your overall taxable income for the year (which is beneficial since it serves as a tax break and can increase your tax refund). Secondly, whatever amount you withdraw from your RRSP is taxable, but only at the time of your withdrawal; the idea being you should wait to withdraw your RRSP until retirement when you’ll be in a much lower tax bracket and pay far fewer taxes. RRSPs offer less flexibility in terms of when you can withdraw funds, with serious tax implications for taking out funds early before retirement. However, in certain circumstances, RRSPs can be withdrawn early with no penalty - namely, when buying your first home - making it a good option for aspiring first-time home buyers.