A tax-free savings account (TFSA) allows you to save for any financial goal, and withdraw money at any time. Your savings grow tax-free, and you don’t need to pay any tax on withdrawals. However, unlike a registered retirement savings plan (RRSP), the money you contribute to a TFSA is not tax deductible – you contribute after-tax dollars.
There are contribution limits. If you contribute too much to your TFSA, you’ll pay a penalty of 1% per month on the excess amount until you remove it. If you over-contribute deliberately, you’ll pay a 100% tax on any gains or income you make on the excess amount. There are also penalties for holding investments that are considered prohibited by the Canada Revenue Agency (CRA).
For more information about TFSAs, visit the CRA website.