TFSA - Tax Free Savings Account The tax-free savings account is a multipurpose, registered bank account that enables Canadian residents to earn additional tax-free income with the aim of meeting their savings needs more easily over the course of their life span. The TFSA is intended to supplement currently available registered savings plans like the RRSP. The TFSA offers a host of benefits to its holder. First of all, withdrawals from the account are tax-free, as is the investment income made through it. If you do not make withdrawals, unused sums accumulate over a period of time because you are able to carry them forward. The maximum annual contribution to a tax-free savings account is $5,000 CAD per year for all Canadian residents aged 18 or older. The TFSA dollar limit is indexed to inflation, and the total withdrawals in a year go toward the contribution room for the year to follow. It is possible to put back all the money you withdrew from the account in the years to come. Keep in mind that you could be penalized for making a second contribution in the same year, because your contributions might exceed the maximum permitted amount. Unfortunately, your contributions will not be tax-deductible. Holders of the TSFA can choose from a wide range of investment options. These include bonds, mutual funds, guaranteed investment certificates and more. Withdrawals and earnings from the TSFA are completely independent of the eligibility criteria in terms of federal benefits. These are the Old Age Security and the Canada Child Tax Benefit. This means one does not affect the other. Upon the death of the holder, the funds in the TSFA are usually payable to the spouse or common-law partner. The TSFA is an excellent savings tool for pre-retirement needs. Considering that most people have a wide variety of savings goals – car, home, college – the full sum that is withdrawn from the TSFA can be put in again the next year so that you do not suffer savings losses. This account type offers more savings options to retirees and to clients with low or lower than average income. The TSFA is a great tool for starting a business as well. If you put in $3,000 a year for a decade, the savings will have reached $40,000 at the end of this period. This is quite enough to start your own business. Remember, withdrawals are tax-free! Then you can sell your business in another decade and re-contribute your funds, including sales proceeds, to the account. This way the contribution room will not be reduced. The big Canadian banks offer tax-free savings accounts. At BMO, for example, clients benefit from saving and investing up to $5,000 annually and don’t pay tax on accrued earnings. The TFSA may be structured as an investment account holding securities or as a savings account. A TFSA may hold mutual funds, term investments, cash, as well as individual securities such as bonds and stocks. The mutual funds and GICs of the Bank of Montreal are another good choice for a TFSA. Customers of Royal Bank enjoy a variety of benefits by opening a tax-free saving account. For example, their earnings from qualified investments, be it capital gains, dividends, or interest, are not subject to tax. Holders do not pay taxes even on withdrawing their money. With TD Bank, clients pay no taxes on investment income earned in the account. They can withdraw money at any time, and no tax is paid on the withdrawals. The maximum contribution is 5,000 per year.