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The Best Tax Free Savings Accounts (TFSA) in Canada for 2024
At some point in time, someone probably told you to save your money. Actually… scratch that, someone has definitely told you to save! Although, what people may not have told you is what to do with those savings exactly. Setting money aside is a good financial habit, but you should be doing something with those savings aside from keeping them in a simple savings account.
Savings are best utilized when they’re earning more money. Make money on your money? Yes please! You have some options when it comes to using your savings, one of which is a tax free savings account, TFSA for short. Despite a TFSA’s many benefits, a lot of people are not using them to their full potential due to lack of knowledge. Let’s explore what a TFSA is, what the benefits and limitations are, the best TFSAs in Canada and whether a TFSA is right for you below.
What is a TFSA Account?
Tax free savings accounts were introduced by the Canadian government 10 years ago. The idea was to help Canadians save money and earn interest on those savings with corresponding tax benefits. The main benefit of a TFSA is the contributed money, earned interest, investment income and gains are all tax free. Aside from the fact that money in a TFSA is tax free, there are no other tax benefits.
Requirements to Open a TFSA
To open a TFSA in Canada, you only need to meet two requirements: be 18 years of age or older and have a valid social insurance number (SIN).
There is one limitation if you’re considered to be a non-resident for tax purposes. Any contributions are subject to 1% tax for each month a contribution stays in the account. Broadly, non-residents are typically individuals who are leaving Canada after being considered a resident. For more information, visit the CRA website.
Contribution Limit Maximums of TFSAs
A drawback of TFSAs is there’s a maximum amount you can contribute known as “contribution room”. If you exceed your contribution room, 1% tax will be applied to the excess balance for every month that it remains in the account. Contribution room is accumulated every year based on what the CRA decides the contribution room will be. You only accumulate contribution room for the years that you are 18 or older and have a valid social insurance number. If you withdraw from a TFSA, you can reimburse the amount you withdrew.
Annual TFSA Dollar Limits
- $5,000 in 2009, 2010, 2011 and 2012
- $5,500 in 2013 and 2014
- $10,000 in 2015
- $5,500 in 2016 and 2017
- $5,500 in 2018
- $6,000 in 2019
$6,000 in 2020
$6,000 in 2021
$6,000 in 2022
$7,000 in 2023
If you are unsure of what your TFSA contribution room is at any point in time, you can find the amount on your CRA account or by calling the CRA. For more information on TFSA contributions, visit the CRA website.
Withdrawing from a TFSA
Generally speaking, you can withdraw from your TFSA at any point in time. The only limitation is the types of investments you have in your TFSA. As mentioned, withdrawing from your TFSA does not change the cumulative contribution room you have. You can reimburse the withdrawn amounts at any point in time. The golden rule is to never go over the total contribution room you have. For more information, visit the CRA website.
A Word About Taxes
Another benefit of TFSAs are the tax advantages. Any money that is contributed to a TFSA is taxed in the year that it earned by you. When money is withdrawn, its tax free or, in other words, it’s not taxed again – hence the term tax free savings account! This is a notable point because the opposite is true for other government savings accounts such as a Registered Retirement Savings Plan (RRSP). Also, any investment income earned in a TFSA is entirely tax free. This is a huge advantage since investment income is normally subject to taxes.
What Are the Benefits of a TFSA?
TFSAs have been a source of financial buzz for the last ten years since they were introduced. What exactly is all the hype about? Let’s explore the benefits of a TFSA below.
- No Income Requirements. To open a TFSA, you do not need any minimum requirements for income. This means basically anyone can start saving and benefiting from a TFSA.
- Withdraw Money with Ease. If you use your TFSA to save for big and small expenditures, you can easily withdraw money when you need it. This means you can achieve both your long- and short-term financial goals with ease. It’s important to note that withdrawals are not taxed, which is convenient.
- Reduce Taxes on Investments. Investments are usually taxed at the highest rate, unless they are within a TFSA. For example, interest income and foreign dividends would normally be taxed at the highest rate. If money and personal finance is not your forte, you may want to reach out to a professional to get advice on how to best manage your investments.
- Goes Well with an RRSP. When you’re retired, you can withdraw money from your TFSA tax free. With an RRSP, you are required to pay tax on your withdrawals. Using a combination of both can help you out when you’re retired.
- Flexible Savings. TFSAs have contribution limits and can be carried forward to future years if you don’t use them in full. This will help you to manage your savings better and with flexibility.
- Motivates Savings. If you’re not the type to set money aside, a TFSA can motivate you to save more. Afterall, there are ample benefits which can kick start your savings mentality!
Best TFSA Accounts in Canada for 2024
Now that you know all about TFSAs and what they can do for you, let’s take a look at some real life TFSAs. Below are the best TFSAs Canada has to offer in 2022, many of which are in your local neighbourhood!
Tangerine TFSA
Tangerine bank has many attractive offers for their customers, including no fee chequing accounts and a cash back credit card. Tangerine also has an attractive TFSA with a 2.75% interest rate for 6 months and 0.70
% interest rate after the introductory period passes. This TFSA has no minimum account balance requirements or annual fees. Another benefit of banking with Tangerine is their automatic contributions feature and their goal tracking feature to monitor progress.
CIBC Tax Advantage Savings Account
This account has no monthly fees, but e-transfers still cost their full amount, $1.50 each. In addition, the interest rate is 1.15% which is ideal for short term deposits. Individuals who prefer to bank with traditional institutions that have physical branches may prefer CIBCs style.
Scotiabank Savings Accelerator
The savings accelerator is a TFSA account and is an ideal option for individuals with a large savings fund, such as for retirement. Scotiabank has several benefits including no fees, enjoy banking with an established institution and free money transfers within Scotiabank accounts. Scotiabank has many other advantageous accounts too, but the benefit of the TFSA is tiered interest. Interest on TFSA balance above $250,000 is 1.15% and 1.05% below $250,000.
motusbank
The TFSA account at motusbank offers a lovely interest rate of 2.5% and offers you flexibility through their online banking platform. There are no monthly account fees, minimum balance requirements and unlimited transactions for those who like banking on their own. Your deposits are also insured up to $100,000.
Implicity Financial
One of the leading online financial institutions, Implicity Financial is a division of Entegra Credit Union. With an Implicity Financial TFSA, you will earn 2.4% interest on your money. If you aren’t blown away by this interest rate, you should be! This is one of the best interest rates on the market. Fortunately, there are no annual fees with this account and deposits are unlimited. On the other hand, you are limited to only one free withdrawal per month.
Motive Financial
A division of Canadian Western Bank, Motive Financial is another online bank. Because of its relation to Canadian Western Bank, the Canada Deposit Insurance Corporation secures your deposits. Similarly, to Implicity Financial, Motive Financial offers a 2.4% interest rate on TFSAs. In addition, there is no minimum account balance requirement and transfers are unlimited and free.
Alterna Bank
At Alterna Bank, you will benefit from a TFSA with no minimum balance and no monthly fee. Alterna Bank offers an interest rate of 2.35% on deposits. Deposits to an Alterna Bank TFSA are done by linking your external bank account. The name for these transfers is “me-to-me transfers” and they are unlimited with no cost. Another benefit of banking with Alterna is you can open an account from anywhere in Canada because the bank is 100% online.
Hubert Financial
The Happy Savings Account offered by Hubert Financial is able to give you an exceptional interest rate of 2.5%. Hubert is another online bank that can offer phenomenal savings and interest to their customers because they don’t have the high cost of physical branches dragging them down. The TFSA also has no minimum balance requirements, no charging fees and full access to your account from an online dashboard. You can easily link your account to external bank accounts and bank on your mobile too.
Is a TFSA right for me?
A TFSA is quite commonly used by Canadians across the nation due to its relative lack of limitations and comparatively low cost. If you have some savings and are wondering what to do with them, using a TFSA, as opposed to a regular savings account, might be in your best interest. Afterall, a TFSA is a great way to make money on your idle money without having to worry too much about fees and other limitations. Even if you don’t fully use your contribution room, having a TFSA ready can be a helpful reminder to save.
When it comes to saving and investing, a TFSA is one of the best ways to go in Canada. Although, there are two instances where you might not want to open a TFSA just yet. One is if you aren’t in a position to start seriously saving. When you’re in school or unemployed, saving might not be your priority at the moment and that’s perfectly okay. In life, sometimes you need to lay the groundwork before you can get serious about finances and saving. The other instance is if you’ll become a Canadian non-resident in the near future. There are tax consequences to be a non-resident with a TFSA, best to avoid those consequences if you can. To learn more about non-resident definitions in Canada, visit the CRA website.
How to Choose the Right TFSA for You
To choose the right TFSA for you, you need to consider your current financial position and future financial goals. From there, you can find a TFSA that suits your needs best. Below is a list of questions to ask yourself when going through the process of selecting a TFSA.
- Do you have long term or short-term savings goals?
- Is a low cost TFSA important to you?
- Are you planning to make a lot of withdrawals from your TFSA?
- Does it matter if you work with two separate financial institutions?
- Do you want a high interest rate?
Saving for a Brighter Financial Future
People always say to save for a reason – it’s important for your financial future! Savings can help with a lot of things including retirement, traveling, emergencies and investments. A TFSA is one amazing tool you can use to help you reach your savings goals. However, take some time to look at other savings and investment financial products on the market, perhaps there are financial products on the market that might work better for you!
