Last updated: Feb. 21, 2024
Whether you want to establish an emergency fund, set aside money for retirement, or compile cash for a down payment on a house, you might think your only option is to open a savings account at your local bank.
Although a savings account is a fantastic way to save money, there are other ways to meet your goals. Depending on how you plan to use the money you are saving, you may find that a tax-free savings account (TFSA) is a better choice.
Let’s take a closer look at the differences between TFSAs vs. personal accounts and how each savings account can be used to save money and grow wealth.
Key Differences Between TFSAs vs. Personal Savings Accounts
Although the names are similar, traditional savings accounts and TFSAs function quite differently.
Personal Savings Account
A savings account is a deposit account, usually through a bank, that pays interest on the account balance.
There are no limitations on how and when you can use the funds in your personal savings account. You can withdraw money at any time and use it for any purpose.
Many banks offer a few different varieties of savings accounts, including:
- High-yield savings accounts
- Certificates of deposit
- Money market accounts
Some banks also offer specialty savings accounts that help you focus on saving for a specific goal, such as a down payment on a house, college tuition, or retirement income.
Another benefit of opening a traditional savings account is that the Canada Deposit Insurance Corporation (CDIC) insures deposits up to a specified amount when they are held at a CDIC member institution.
There are a few factors to consider when putting your money in a savings account.
Banks and credit unions typically offer lower interest rates on savings accounts than you may get from other investment options, and the interest you do receive is taxable.
You may also be required to maintain a minimum balance or pay a monthly maintenance fee; however, many banks will waive these fees if you meet certain requirements.
Tax-Free Savings Account
Unlike a traditional savings account, a TFSA allows you to build an investment portfolio without paying taxes on contributions, interest earned, dividends, or capital gains.
Similar to a registered retirement savings plan (RRSP), a TFSA gives you the freedom to invest in a variety of products—stocks, bonds, exchange-traded funds (ETFs), mutual funds, and guaranteed investment certificates (GICs)—but with nothing to declare on your Canada Revenue Agency return.
Although you can open as many TFSAs as you like, your total contributions cannot exceed the annual contribution limit. In 2024, the TFSA contribution limit is $7,000, up from $6,500 in 2023 and $6,000 in 2022.
The difference between the contribution limit and how much you have deposited into your TFSA is called your “contribution room.” If you don’t max out your contribution in a given year, any unused contribution room rolls over to the next year.
For example, if you contribute $1,000 in 2022 and $2,000 in 2023, you can contribute up to $16,500 in 2024.
You can withdraw money from your TFSA at any time without penalty, and the withdrawal amount will be added back into your contribution room the yearfollowing the withdrawal, not the same year.
This is an important point to remember because if your contributions exceed the annual limit, you will be taxed on the overage.
TFSAs are only available to Canadian residents. If you temporarily or permanently relocate outside of Canada, your TFSA contribution room doesn’t accrue for any year during which you aren’t a resident.
If you aren’t a resident of Canada but you have a Canadian Social Insurance Number, you can open a TFSA, but any contributions you make while living outside of Canada are subject to a 1 percent tax for each month the contribution is in the account.
Unlike a traditional savings account, if your financial institution fails, the CDIC may not insure some of the investment products in your TFSA, including:
- Mutual funds
- Stocks
- Bonds
- ETFs (though GICs are covered by deposit insurance)
Which Type of Savings Account Is Right for Me?
The easy answer is that a well-rounded, diversified personal finance portfolio needs both!
Contributing regularly to your personal savings account ensures you have fast access to liquid funds for emergencies, large purchases, or unexpected expenses.
Investing in a TFSA helps you build medium- to long-term wealth with tax-free compounding interest—and it’s a great way to complement an RRSP to boost your retirement income.
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