What is a TFSA and how does it work?

Maybe you're saving for your dream car, to go back to school or for the around-the-world trip you're planning for your next big birthday. Or perhaps your savings goals are more prosaic but just as important, like putting money aside for retirement.

No matter what you're saving for, you want all the advantages you can get.

Meet the TFSA or tax-free savings account. Launched by the federal government in 2009, this program allows Canadians to put aside a certain amount of money each year and grow it tax-free. In other words, all the money you earn on the savings and investments you put in your TFSA stays in your pocket — you don't pay income tax on your interest or gains, and you don't pay tax when you withdraw funds, either.

But how does a TFSA work, and how can you make the most of it? Read on for the details on contribution limits, TFSA benefits, and more.

How does a TFSA work? 

A TFSA is an account registered by the Canada Revenue Agency (CRA). When setting up and organizing a TFSA, Canadians must follow specific rules around eligibility and contribution amounts.

Setting up a TFSA is simple. These are the typical steps:

1. Open a TFSA at a financial institution such as Tangerine, which has some great TFSA options.

2. Choose what type of account you want for your TFSA. You can choose from GICs, investments such as mutual funds, bonds or ETFs, or ordinary savings accounts. 

3. Fund the account — that is, make your first contribution and start saving.

You can have TFSA accounts at multiple banks or brokerages if you choose, but keep in mind that this can make it harder to track how much money you've put into your TFSA — and that's important. (More on that below.) 

Are there contribution limits for a TFSA? 

One thing to be aware of with TFSAs is that contribution limits can get a bit complicated. Stay with us, though, as we discuss the details.

First, know that there is a limited amount of contribution room in your TFSA — but that room grows every year starting when you turn 18, and it adds up over time, whether or not you've been putting money in a TFSA account. This is important to know because there's a penalty for over-contributing. You'll have to pay 1% on the excess amount — yikes!

Where does that contribution limit come from? Well, it takes a bit of math. To start with, each year, the federal government sets an annual contribution limit. For 2025, the contribution limit is $7,000, which means that's how much additional money you can put into the account in that year. Furthermore, each year, you get more contribution room in your account.

One super helpful thing about the contribution limit is that the unused portion will carry over. In other words, if you didn't contribute the $7,000 maximum in 2024, that space isn't lost forever — you can catch up any time after that. Canadians who were 18 or older when the TFSA program started in 2009 and resided in Canada during that entire time have an accumulated contribution limit of $102,000 as of 2025 — that's each annual contribution limit from 2009 to 2025 (inclusive) added together.

If you were younger than 18 in 2009, your total contribution room started the year you turned 18 and has accumulated more room each year you have resided in Canada since then.

One more thing to remember: withdrawing money from your TFSA will affect your contribution room, too. You do get to put it back, but not right away: if you make a withdrawal, you get the contribution room to put that money back in your TFSA the following year. For instance, if you take out $1,000 in 2025, that $1,000 becomes part of your allowable contribution limit in 2026.

The government provides a simple formula to calculate your contribution limit for any given year. Simply add together the following three items:

• The current year's contribution limit;
• Any amount(s) you didn't use in previous years; and
• Any amount(s) you withdrew in the previous year.

For example, let's look at an imaginary Canadian called Marija. In 2024, Marija had $15,000 in unused contribution room and withdrew $5,000 from her TFSA. Here's how she would calculate her contribution limit for 2025:

$7,000 (2025 contribution limit) + $15,000 (unused amount from previous years) + $5,000 (2024 withdrawals) = $27,000.

You can view your personal contribution limit online on your CRA Account page and in your Notice of Assessment (NOA), but keep in mind that the CRA may not have the most up-to-date information from your financial institutions. It's your responsibility to keep track of your TFSA contribution room.

What types of investments are allowed in a TFSA? 

The S in TFSA makes many people think they're only for savings and not investing — but that's not true. It's important to understand the difference between saving and investing so you can pick the right option for your goals. The money in your TFSA can be allocated to a wide range of investment and savings options, including:

• High-interest savings
• Mutual funds
• Bonds
• GICs (guaranteed investments)
• Securities on a designated stock exchange

Since TFSA earnings are tax-free, making as much money as possible within this registered account makes sense. 

What is the difference between a TFSA and RRSP? 

Are you confused about the difference between TFSAs and RRSPs (Registered Retirement Savings Plans, called RSPs at Tangerine)? You're not the only one — in fact, they have a few things in common. Here's a quick run-down of some key points:

One essential difference between a TFSA and an RRSP is how they work with income tax. Everyone loves making RRSP contributions because they often result in a tax refund. That's because RRSP contributions come from pre-tax income, so they lower the amount of income on which your income tax is calculated. For example, let's say that in the 2025 tax year, you earn a salary of $50,000 and put $5,000 into your RRSP. All other things being equal (and yes, the situation can be more complicated than this), your income tax payable will be calculated on $45,000 (aka $50,000 minus $5,000). However, you will still have to pay taxes eventually. With an RRSP, you pay income tax on withdrawals, whether you make them next year or 30 years from now. Usually, people make RRSP withdrawals in retirement, when you are likely to be in a lower tax bracket. 

A TFSA won't affect the income taxes you pay today — contributions come from after-tax income — but everything in that account is yours, with no tax due when you decide to withdraw.

What does that mean when it comes to real-world decisions? The answer depends on tax bracket, which is a tough way to choose, because you can't predict what it will be when you retire. But a quick and dirty answer is that it's better to pay taxes when your income is lower. If you think your income is lower now than it will be in retirement, this often applies to younger people who are new to the workforce or not working, then you're probably better off putting money into a TFSA. An RRSP might be a better choice if you think your current salary is higher than your income will be in retirement. 

Another consideration: if you expect you'll need your contributions for a significant expense a number of years from now (before retirement), you might choose a TFSA. That way, you won't increase your taxable income when you withdraw the funds. 

What you end up choosing will depend on your unique financial situation and your short- and long-term plans. Of course, there's no reason you can't contribute to both accounts. Saving for the future is a good thing!

Benefits of a TFSA 

TFSAs are a convenient way to set aside money for several reasons. For example:

• They can be easy to set up, especially with a financial services provider like Tangerine.
• You can contribute up to your contribution limit whenever you want.
• You can choose from different savings accounts or types of investments, such as GICs or mutual funds, to support your financial goals.
• You can access your money anytime (provided it's not in a locked-in investment like a GIC).

A TFSA is a good place to save for retirement, but that's not the only use of these accounts. For instance, if you're saving for your dream wedding, you can use your TFSA to keep accumulating funds and then withdraw them when the big day arrives.

And since the number-one rule for saving is to actually save, you can maximize the benefits of your TFSA by setting up an automated contribution from your bank account. For example, if you get biweekly paycheques (26 per year) and want to contribute the $7,000 maximum for 2025, you could transfer $269.23 into your TFSA account each payday.

Speaking of paycheques, check with your employer to see if they have any programs to "match" TFSA contributions — i.e. to put some of their money into the pot. This is a workplace benefit you don't want to miss out on.

Who can open a TFSA? 

So, who can open up this useful type of account? To be eligible for a TFSA, CRA rules state that you:

• Are 18 or over
• Have a valid social insurance number

You don't have to be a resident of Canada to open or hold a TFSA; however, any contributions you make while a non-resident are subject to a one percent tax. The residency rules can be complex, so it's best to check your status with the CRA if you're unsure.

Before opening or adding money to a TFSA account, make sure you understand your contribution limits so you don't overcontribute. Also, consider what the money will be used for so you can choose the best investment or savings vehicle for you.

Tangerine offers a selection of options for your TFSA, including Tax-Free GICs and Investment Fund Accounts in addition to the Savings Account, so you can pick the ones that suit your needs and goals.

Getting started with a TFSA at Tangerine 

Opening a TFSA with Tangerine is quick and easy. Simply go to the website and hit "Become a Client" to get started. Or if you're already a Client, log in and open an account.

If you're unsure how you want to invest, you might want to begin with a flexible TFSA savings account that lets you start growing your money without making any big decisions. 

Getting started with a TFSA is straightforward, and it's a great step toward maximizing the tax-free benefits available to you and building your financial future.