Canadians contributed over $66 billion to tax-free savings accounts in the 2018 contribution year, the latest year the government has published information for.
That’s a lot of money in tax-sheltered accounts but even then, the average Canadian has over $34,000 of unused contribution room. If you’re one of those people with unused contribution room in your TFSA, the sooner you top it up, the sooner you’ll be earning that tax-free interest.
A TFSA, or tax-free savings account, is a type of tax-sheltered account that lets you earn interest or other types of income tax-free.
While the name sounds like these accounts are similar to a typical savings account, that doesn’t have to be the case. Your TFSA can be a simple interest-earning bank account but it can also be a portfolio of stocks, mutual funds, GICs, or other qualifying investments.
No matter what type of financial instruments make up your TFSA, any appreciation on that money — interest, dividends, or otherwise — is not taxed.
This lets your money grow much faster than in a typical investment account where you have to pay tax on any earnings you make.
To open a TFSA, you need to be a Canadian citizen, 18 years of age, and have a Social Insurance Number (SIN).
TFSA's are a relatively recent addition to Canadians’ tax-planning options. Registered Retirement Savings Plan (RRSP) is the other common type of account and the one most people are familiar with.
An RRSP is similar to a TFSA in that any earnings on the money you deposit in it accumulate tax-free. The difference is when you withdraw money from an RRSP, you’ll have to pay income tax on it at that point.
With a TFSA, you don’t pay any taxes on withdrawals.
The main benefit of an RRSP is that it lets you deduct your contribution from your total income in the year you make the deposit. There’s no tax reduction involved when you contribute to a TFSA.
While an RRSP is a sound savings instrument, most advisors would suggest prioritizing your TFSA.
It would be nice if you could contribute as much money as you have available to a TFSA so it could all earn tax-free income but unfortunately, there are limits.
The Canadian government introduced the TFSA in 2009. The annual contribution limit varies from year-to-year, as follows:
You can carry any unused contribution room forward so if you have never contributed and were at least 18 in 2009, your contribution limit for 2021 would be $75,500 — the total of all the years.
To figure out your contribution limit, just add up all the years you qualify for and deduct any contributions you have made up to this point. The difference is your limit.
And keep in mind that if you withdraw funds from your TFSA, it frees up that portion again so you can re-contribute later; however, only starting from the following year.
The Canada Revenue Agency also provides your current contribution limit on your notice of assessment when you file a tax return or through its online My Account service.
Make sure you’re aware of your contribution limit and you don’t exceed it when depositing funds in your TFSA. If you contribute more than the maximum limit, you’ll get charged a penalty of 1% per month on the excess amount for as long as it is still in your account.
There’s no limit on your total number of TFSA accounts. You can have a single TFSA or you can have several accounts spread across different institutions.
While you can have as many accounts as you want, your total contribution limit is always the same. The total amount you contribute to all the accounts can’t exceed your limit.
If your TFSA holdings are straightforward, such as all being in simple interest-earning accounts, there are no significant benefits to opening more than one account. There are really only two reasons you might want to consider it.
First, if you want to diversify your TFSA across different types of investments, such as interest-bearing accounts, stocks, and mutual funds, you’ll likely need more than one account.
Second, if your TFSA balance gets high enough, you may want to think about opening more than one for deposit insurance advantages. The CDIC (Canadian Deposit Insurance Corporation) only covers up to $100,000 in TFSA accounts held at member institutions.
If the bank were to become insolvent and unable to pay you the money it’s holding on your behalf, the CDIC covers up to that $100,000. If your balance exceeds that, it’s safer when you have it in separate banks.
It might be unlikely that a major bank will shut down but do you want to take any chances with your money?
Investing in a TFSA is similar to any other type of investment — the best type of account depends on your financial situation.
If you want your TFSA to be fairly liquid then you’re best to stick with simple interest-bearing savings accounts or something else that lets you withdraw funds quickly. This is important if you expect to withdraw money to buy a home or pay for medical expenses that aren’t covered by your healthcare plan, for example.
If you aren’t as concerned about having quick access to the funds in your TFSA, stocks, bonds, mutual funds, or other long-term investments may provide a higher rate of return.
Your age can play a factor here as well. If you’re closer to the start of your working life than the end, you’ll have more time to let your money accumulate. That means you can put it in more volatile investments because any losses will likely get offset by gains over the long-term.
Similar to regular chequing and savings accounts, TFSA rates vary from one bank to another. And TFSAs held in other investments, such as mutual funds, won’t offer a fixed rate.
We’ve researched the best TFSA accounts across various banks and the following are our top picks.
When you’re considering bank accounts for your TFSA, the rate isn’t the only thing to look at. Make sure you check for the following benefits as well:
Paying fees will offset some or all of your TFSA earnings.
EQ Bank offers one of the best TFSA rates you’ll find in Canada at the moment. Their TFSA pays 2.30%* annually.
And that’s not a promotional rate that’s only good for a few months. There are no fees or minimum balance, so you won’t have to pay any of your earnings to the bank.
EQ Bank also offers GIC options for TFSA which pay higher interest rates than many other institutions. Opening a TFSA account with EQ Bank is a fast and simple process, however, you’ll first need to open a Savings Plus Account.
Tangerine is one of the biggest online-only banks in Canada. Its current TFSA savings rate is 2.10% for new accounts.
The catch here is that it’s an introductory rate that’s only good for the first 5 months you have your account. After the promotional period ends, it drops to 0.10%.
If you don’t already have a Tangerine account, it pays well for the first few months. After that, you may want to look at transferring your TFSA account elsewhere.
CIBC’s Tax Advantage TFSA has one of the highest rates among Canada’s Big Six banks at 1.45%. It’s not a promotional rate so you don’t have to worry about it dropping after a few months (unless rates go down across the board).
There are no monthly fees, no minimum balance, and transfers between your other CIBC accounts are also free.
motusbank is a recent addition to the list of options for TFSAs in Canada. It offers a 2.50% interest rate for TFSA accounts, but opening an account is not as easy as with some alternatives.
To open a TFSA with motusbank, you’ll need to do a hard credit check. This type of credit check will hit your credit report the same way a loan or credit card application would.
If you expect to apply for a loan, finance a new car, or buy a home in the next several months, wait until afterward to apply for a TFSA here. The credit check could impact your credit score and your other applications as a result.
MAXA Financial is a credit union based in Manitoba but it serves the entire country, including Québec. Its TFSA account offers a competitive rate of 2.45%.
The only catch is that you have to be a member of the credit union to open an account. You need to buy a share to join but it’s only $5 so it’s not an unreasonable cost.
MAXA offers the extra benefit of being insured by the Deposit Guarantee of Manitoba rather than the CDIC. The DGCM doesn’t have a limit on its insurance so you don’t have to worry about the $100,000 cap that CDIC offers.
If you’re more inclined to put your TFSA contributions into other investments like stocks, bonds, and mutual funds, you may want to look at other options besides traditional banks.
Some of the banks offer limited investment options, such as GICs, but they generally focus more on traditional bank accounts.
Wealthsimple is an investment service that gives you many more options for investing your money. It offers online brokerage services as well as savings accounts and even tax-filing services.
Wealthsimple also has one of the best available robo-advisors in Canada.
You don’t have to use their advisory service though. Wealthsimple Trade option gives you complete control over your portfolio, so you can buy and sell any individual stocks you wish, without fees.
Questrade also offers both robo-advisor and self-directed options. Its online experience is second-to-none and its fees are quite competitive.
Questrade focuses on investment products so there’s no savings account or other traditional banking options.
While a TFSA doesn’t have the tax deduction benefits of an RRSP, it earns interest tax-free, making it a better financial instrument in most cases.
If you’re looking for the best bank accounts in Canada, Insurdinary is here to help. We provide side-by-side comparisons so you can see exactly how different banks stack up. Visit our site today for all the details.
And if you’re in the market for insurance, we’ll provide the best quotes and offers in the country. Get a free quote today.