TFSA Guide
Investing can feel like something you’re supposed to already understand.
You’ll hear people talk about RRSPs, FHSAs, contribution room, and tax deductions. It starts to sound complicated quickly. And when you’re juggling classes, rent, part-time work, and everything else, figuring out the “perfect” account probably isn’t at the top of your list.
The good news is you don’t need to overthink it. If you’re a Canadian student just getting started, there’s usually one account that makes the most sense to begin with. It’s the TFSA!
What is a TFSA?
TFSA stands for Tax-Free Savings Account.
The name makes it sound like a regular savings account, but it is actually much more than that. A TFSA is a special type of investment account created by the Canadian government that lets your money grow without being taxed.
Here is what that means in simple terms.
Normally, if you invest money in a regular investment account (like buying stocks, for example) and earn a profit, the government may charge you tax on a part of that profit. However, in a TFSA, none of it is taxed! If your investments grow by $1,000, you get to keep the full $1,000. If you take money out later, you don’t pay tax on that withdrawal.
That is the core benefit.
Who Can Open a TFSA?
You can open a TFSA if you are at least 18 years old, are a Canadian resident, and have a valid SIN.
Once you turn 18 and are living in Canada, you start building something called a contribution room each year. We’ll explain exactly what that means next.
If you’ve never opened a TFSA before, that’s completely fine. Your unused room carries forward. You don’t lose it just because you waited.
How Contribution Room Works
Contribution room is simply the maximum amount of money you’re allowed to put into your TFSA.
Only the money you personally deposit counts toward your limit. If your investments grow, that growth does not use up any contribution room.
Once you turn 18, you automatically start building contribution room, even if you haven’t opened a TFSA yet. Every January 1st, you receive new contribution room. The exact amount is set by the government each year.
One thing to note is that if you max out your TFSA and then withdraw the money later that same year, you’ve still used up your room for that year. You’ll need to wait until January 1st of the following year to get that room back, along with the new annual limit.
Another thing to be careful about is overcontributing. If you go over your limit, there is a 1% per month penalty on the excess amount until it’s corrected. For example, if your limit is $10,000 and you deposit $11,000, you’ll be charged 1% per month on the extra $1,000. That’s $10 per month until you fix it.
Below, you can enter your birth year to estimate how much contribution room you may have today.
What Can You Hold?
A TFSA is just the container - what you put inside it is up to you.
You can hold cash, GICs, ETFs, stocks,mutual funds, and other investments inside a TFSA.
One important thing to understand is that opening a TFSA does not automatically mean your money is being invested. If you deposit money and leave it as cash, it’ll simply just sit there and not grow.
To actually grow your money, you’ll need to use those funds to purchase investments within the account. The TFSA gives you the flexibility to decide how you want to use it.
Common Mistakes
The TFSA is super simple, but there are a few common mistakes to watch out for.
Overcontributing is the biggest one. If you deposit more than your available room, there’s a 1% per month penalty on the excess amount until it’s corrected. Always track what you put in.
Another common mistake is withdrawing money and then immediately redepositing it in the same year. You only get that contribution room back on January 1 of the following year, which means you could lock yourself out of investing for months if you’re not careful.
Some students also assume that once they open a TFSA, their money is automatically invested. It’s not. If it’s sitting as cash, it won’t grow. You need to actually invest it for it to increase in value.
And finally, avoid investing money you know you’ll need in the near future. While you can withdraw from a TFSA at any time, investments can go up and down. If you’ll need the money in a few months, it may be safer to keep it in cash.
Final Thoughts
The TFSA is simple, flexible, and powerful when used correctly. You don’t need to max it out right away, and you don’t need to understand every investment option on day one.
You just need to understand the basics. Start small. Stay within your limits. Build from there.
