The Canadian Tax-Free Savings Account (TFSA) bears some resemblance to the U.S. Roth IRA. Both provide for non-deductible contributions and tax-free withdrawals. The TFSA account is less restrictive regarding penalty-free withdrawals and therefore serves as a general-purpose savings/investment vehicle, not one solely geared toward retirement.


A Registered Retirement Savings Plan (RRSP) is the analog of the American traditional IRA. In contrast to a TFSA, contributions to a RRSP are tax-deductible and withdrawals are taxable as regular income. In addition, the RRSP contributions cant exceed 18 percent of your previous years earned income, up to the maximum annual amount, whereas TFSA allows up to 100 percent contribution of earned income, subject to an annual cap. RRSP accounts must be converted to other types of accounts at age 71, but no such requirement exists for a TFSA.


All Canadian residents can open TFSAs if they have reached age 18 and hold a Canadian Social Insurance Number (SIN). The age threshold is 19 for certain Canadian territories and provinces, in which case you can retroactively make your age-18 contribution when you reach 19. Non-residents of Canada can open a TFSA, but contributions are subject to a monthly tax of 1 percent for each month the contribution remains in the account. You can also contribute to the TFSA of a spouse or common-law partner.

Account Set-Up

You can open one or more TFSAs at a financial institution, insurance company or credit union that issues these accounts. You must give the issuer identifying information, including your SIN and date of birth, and any supporting documents it requires. The issuer then registers your TFSA with the government and you can begin to make contributions. If you give incomplete or incorrect information, your account wont be registered and any income you earn will be subject to current income tax.

Types of Investments

The TFSA regulations allow qualified investments: cash, bonds, mutual funds, listed stock shares, guaranteed investment certificates and particular shares of small business corporations. As with Roth IRAs, self-directed TFSAs are available and provide greater latitude in the types of investments you can make. Certain investment types are prohibited, including most debts of the account holder, debt or shares in a corporation, partnership or trust in which you have a stake of at least 10 percent or one in which you do not have arms-length dealings. Mortgages insured by the Canada Mortgage and Housing Corporation are permitted.


As of 2015, the maximum annual contribution to a TFSA is C$10,000. Unlike with a Roth IRA, you can contribute this amount to your TFSA even if you have a high income. The TFSA uses a concept called contribution room, which is the sum of your current annual contribution limit, previous-year withdrawals and unused previous-year contribution room. Because of contribution room, your actual contributions may exceed C$10,000 in the year. Contributions in excess of your contribution room will be taxed 1 percent per month for each month the excess remains. You can contribute foreign currency, but it will be reported in terms of Canadian dollars for enforcing the annual contribution cap. You can also contribute non-cash qualifying investments at their current fair market value. You can contribute to a TFSA at any age above the minimum.


You can withdraw any amount tax-free from your TFSA at any time. Withdrawals during the year do not reduce the total amount already contributed for the year. These withdrawals are added to your contribution room only at the start of the next year. There is no penalty for early withdrawals, and withdrawals dont affect your eligibility for government tax credits and benefits. TFRA assets can be inherited tax-free by a surviving spouse or common-law partner.

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