How a TFSA works
Any Canadian resident who is 18 or older and has a social insurance number can open a TFSA (in provinces where the age of majority is 19, only from 19, though room still accrues from 18) at a bank, credit union, brokerage or insurer. Despite the name, it isn’t only a savings account: it can hold cash, GICs, stocks, bonds, mutual funds and ETFs. You contribute money you have already paid tax on, so there is no deduction. After that, the interest, dividends and capital gains earned inside it aren’t taxed, and neither are withdrawals, whatever your age and whatever the money is for.
Growth doesn’t use room. If $50,000 of contributions grows to $90,000, the extra $40,000 never counted against your limit, and withdrawing all $90,000 adds $90,000 of room the next January.
Because TFSA income and withdrawals aren’t counted as income, they don’t reduce federal income-tested benefits and credits, including Old Age Security, the Guaranteed Income Supplement, Employment Insurance benefits, the Canada Child Benefit and the GST credit. That makes a TFSA useful for retirees near the OAS recovery threshold, for lower-income households who would lose benefits if savings produced taxable income, and as a home for an emergency fund that you can refill later.
TFSA contribution room and the 2026 limit
The annual TFSA dollar limit is $7,000 for 2026, the same as in 2024 and 2025. It is indexed to inflation and rounded to the nearest $500, which is why it moves in steps. Room starts accumulating in the year you turn 18 while you are resident in Canada, whether or not you have opened an account, and unused room carries forward indefinitely. Someone who has been 18 or older and resident in Canada since 2009, when TFSAs began, and has never contributed has $109,000 of room in 2026, the sum of every yearly limit.
Withdrawals come back as room, but only on January 1 of the following year, and that timing causes the most common TFSA penalty. Suppose you have used all your room, take out $5,000 in March for a car repair and put it back in June: the June deposit is an overcontribution, because the $5,000 of room doesn’t return until next January. Excess amounts are taxed at 1% for each month they stay in the account.
TFSA vs. RRSP: which is better?
The two accounts are mirror images. An RRSP gives you a deduction now and taxes withdrawals later; a TFSA gives no deduction but never taxes withdrawals. If your tax rate is the same when you contribute and when you withdraw, they leave you with exactly the same spending money, as the worked example shows, provided you invest the RRSP refund too. The real differences come from rates, benefits and flexibility, which is why many households use both as a form of tax diversification:
- Tax rates: the RRSP wins when your rate in retirement is lower than today’s; the TFSA wins when it will be higher, or when you are in a low bracket now.
- Benefits: RRSP and RRIF withdrawals count toward the OAS recovery tax, which takes 15% of net income above $95,323 for 2026 income; TFSA withdrawals don’t count.
- Flexibility: TFSA money comes out tax-free for any goal and the room returns; an RRSP withdrawal is taxed, has tax withheld and loses its room for good.
- Eligibility: RRSP room depends on earned income; TFSA room accrues to every resident adult, including retirees and people with no earnings.
TFSA vs. Roth IRA, and moving abroad
For American readers, a TFSA is closest to a Roth IRA, and for British readers to an ISA: after-tax money in, tax-free growth, tax-free money out. Against the Roth, the TFSA is more flexible in most ways. There is no income limit and no need for earned income, there is no age or holding-period test like the Roth’s 59½ and five-year rules, and withdrawals return as room. The Roth IRA limit for 2026 is $7,500, or $8,600 at 50 or older.
A TFSA doesn’t travel well. Canada lets you keep a TFSA after you leave, and withdrawals aren’t taxed in Canada, but you earn no new room in a year you are non-resident for the whole year, and a contribution made while non-resident is taxed at 1% a month. Your new country may tax the income or withdrawals. US citizens are the sharpest case: the IRS’s automatic treaty election for Canadian retirement plans, in Revenue Procedure 2014-55, covers RRSPs and RRIFs but not TFSAs, so a US citizen living in Canada generally owes US tax on TFSA income.
Common TFSA mistakes
Most TFSA problems come from treating it like an ordinary bank account, or from assuming that room works the way it does in an RRSP. TFSA room depends on your whole history: every yearly limit since you turned 18, minus every contribution, plus every withdrawal made before this calendar year. Lose track of any one of those and a routine deposit can become an excess that is taxed at 1% a month until it is removed. The mistakes that come up most:
- Re-depositing a withdrawal in the same calendar year without enough unused room.
- Moving money between institutions by withdrawing it yourself instead of asking for a direct transfer.
- Holding only cash for long-term money, when the tax shelter is worth more the more the account earns.
- Contributing after becoming a non-resident of Canada.
- Naming no successor holder, the role that lets a spouse or common-law partner take over the account intact.
Illustrative numbers
$10,000 of pre-tax pay in a TFSA vs. an RRSP, at a 30% tax rate today
- This year’s dollar limit
- $7,000 for 2026, indexed to inflation and rounded to the nearest $500
- Unused room
- Room not used since the year you turned 18, or since 2009 if later, while resident in Canada
- Last year’s withdrawals
- Amounts withdrawn in the previous calendar year, added back each January 1
- This year’s contributions
- Every deposit so far this year, including re-deposits of money withdrawn this year
Direct transfers between your own TFSAs are left out, and investment gains or losses never change room.
Pre-tax pay set aside$10,000
TFSA: invest what is left after 30% tax$7,000
RRSP: invest $7,000 plus the $3,000 tax refund$10,000
Value after doubling over 20 yearsTFSA $14,000; RRSP $20,000
RRSP after tax at 30% in retirement$14,000
RRSP after tax at 20% in retirement$16,000
RRSP after tax at 40% in retirement$12,000
The TFSA delivers $14,000 no matter what. The RRSP matches it when the tax rate is the same at both ends, beats it by $2,000 at a lower retirement rate, and trails it by $2,000 at a higher one. If the refund is spent rather than invested, the RRSP falls behind at every rate.
At a glance
TFSA annual dollar limit by year, 2009–2026
| Years | Annual limit | Room added over the period |
|---|---|---|
| 2009–2012 | $5,000 | $20,000 |
| 2013–2014 | $5,500 | $11,000 |
| 2015 | $10,000 | $10,000 |
| 2016–2018 | $5,500 | $16,500 |
| 2019–2022 | $6,000 | $24,000 |
| 2023 | $6,500 | $6,500 |
| 2024–2026 | $7,000 | $21,000 |
| Total, 2009–2026 | Varies | $109,000 |
Put it in your plan
TFSA in MoneyWhatIf
With Canada chosen under Household, MoneyWhatIf treats a TFSA as free in and out, so nothing is taxed when you withdraw. The withdrawal order ranks a TFSA where it ranks a Roth account, so you can test drawing it before or after an RRSP and see the effect on each person’s own return. The model charges the 15% Old Age Security recovery tax on the whole year’s income, taxable withdrawals included, which lets you compare an RRSP-first and a TFSA-first drawdown against the clawback.
Common questions
TFSA FAQs
How much TFSA room do I have if I turned 18 after 2009?
Add up the yearly limits from the year you turned 18, counting only years you were resident in Canada, then subtract your contributions and add back withdrawals from earlier years. Someone who turned 18 in 2020 and has never contributed has $45,500 of room in 2026: $6,000 for each of 2020–2022, $6,500 for 2023 and $7,000 for each of 2024–2026.
Can you have more than one TFSA?
Yes. You can hold TFSAs at several banks or brokerages, but they all share one contribution room, and each institution sees only its own account, so the running total is yours to track. To move money from one TFSA to another, ask for a direct transfer, which doesn’t touch your room. Withdrawing the money and depositing it yourself counts as a new contribution and can create an excess.
Can you lose money in a TFSA?
Yes. A TFSA is a tax shelter, not an investment, so its value rises and falls with what it holds. A loss is doubly costly: you can’t deduct it, because gains in the account aren’t taxed, and your room doesn’t grow back to cover it, because room only returns as the amount you actually withdraw. Cash and GICs avoid the risk but earn less.
What happens to a TFSA when you die?
If you name your spouse or common-law partner as successor holder, they become the holder immediately. The account stays sheltered, including income earned after your death, and their own contribution room isn’t affected as long as your account had no excess. Otherwise the funds pass to your named beneficiaries or your estate: the value at death arrives tax-free, but income earned after your death is taxable to them, which is why a beneficiary designation matters.