You might assume that the only difference between a Tax-Free Savings Account (TFSA) and a Savings Account is that one is tax-shielded and the other isn’t. Actually, there’s more to it than that. So, what exactly sets a TFSA apart from a regular savings account?
If you’re considering opening a savings account but aren’t sure where to start, this article is for you. You’ll find information on what a TFSA and a traditional savings account are, their pros and cons, and their differences. With a clear understanding of when and why to use each, you’ll be ready to make the right savings account decision.
Understanding the TFSA
A Tax-Free Savings Account (TFSA) allows you to make contributions and earn interest while the capital gains grow tax-free. Since the money you deposit into a TFSA comes from after-tax income, you won’t pay taxes again when you withdraw money.
You can open a tax-free savings account for many reasons, including saving for retirement, for a home, or even to fund your education. When it comes to TFSAs vs savings accounts in Canada, some key differences are worth considering. Let's take a look at what these differences are.
Pros and Cons of TFSAs
Having a well-rounded idea of both the benefits and drawbacks of a tax-free savings account will help you determine if it’s the saving strategy you’re looking for. Let’s look at both the benefits and limitations of TFSAs.
Benefits of TFSAs
The advantages of having your contributions tax-shielded are:
Tax-free compounding of funds: The interest you earn on your TFSA deposits will not only grow tax-free but will also compound. Compounding simply means you’ll earn interest on your interest, so your money will grow much quicker.
Tax-free withdrawals: You won’t pay taxes on money you withdraw.
No income requirement: Whether you’re employed, retired, or a stay-at-home parent, you can contribute to a TFSA. Even income from your spouse or withdrawals from a registered retirement income fund (RRIF) can contribute to your account if you use that money as your own funds.
Risk-free deposits: With an Innovation TFSA, you won’t be exposed to market volatility or unpredictable interest returns. There is a set interest rate throughout your investment term, and your principal deposit is always protected. In addition, Canada Deposit Insurance Corporation (CDIC) insurance offers another safety layer for your funds.
Limitations of the TFSA
Because of its tax-free growth, a TFSA might appear to be the clear choice over a regular savings account. While TFSAs offer multiple benefits for long-term investments, some limitations deserve careful consideration.
TFSAs Have a Contribution Limit
Despite being a powerful financial tool, TFSAs aren’t meant to hold all your savings. It follows that the first drawback of a TFSA is the maximum limit on your annual contributions. For 2025, the annual maximum TFSA contribution limit is $7,000. The cumulative total, as of 2025, is $102,000.
Determining your TFSA contribution maximum is a fairly straightforward process, the Financial Geek explains. Yet, it’s important to keep in mind that the limit exists. Although a TFSA is a free savings account, it’s not going to be your only savings strategy.
A normal savings account has no contribution limit, offering greater flexibility. However, the interest rate of a savings account is most likely significantly lower than that of a TFSA. As with any savings plan and investment, it's essential to know your rate of return rather than waste time having your valuable savings dwell in a low-performing account.
There is a Minimum Age Requirement for a TFSA
Depending on the province, you must be 18 or 19 to open a TFSA account. There are no such restrictions for a regular savings account; even children can open one with the help of a parent or guardian.
You May Not Be Able to Spend Money from Your TFSA Freely
Depending on whether your TFSA is redeemable or non-redeemable, you may have limited direct access to your funds. Non-redeemable options will typically earn you more interest, but you’ll need to lock in your funds for 1 to 5 years. If you know you'll need access to at least a portion of your funds within a year, there are redeemable investment options to consider.
If you opt for a non-redeemable or higher interest rate TFSA, be prepared to coordinate with your financial institution when it’s time to cash out. You can easily withdraw funds on the maturity date of your TFSA term. If you need your funds before that date, be aware that you might face an early redemption penalty. For that reason, if you're looking for an emergency fund, a non-redeemable TFSA might not be the best option.
Contributions Themselves Aren’t Tax Deductible
The money you deposit into a TFSA must come from after-tax income, meaning you’ve already paid taxes on it. The benefit is that you are not taxed on any interest gains you make, like with a savings account.
What is a Savings Account?
A conventional savings account is fairly straightforward. It holds the money you aren’t planning on spending immediately. In most cases, savings accounts help you grow your funds by generating interest. This feature allows your savings to increase with no extra involvement on your behalf.
Note that savings accounts don’t always come with all the withdrawal options of a chequing account. You might face some limitations regarding how much and when you can withdraw. Hence, it is critical to understand the way a savings account works to ensure you know what you’re signing up for.
Understanding the Savings Account
Savings accounts are deposit accounts registered at a financial institution, such as a credit union or bank. Typically, you contribute funds to your savings by transferring money from your chequing account. You might even set up scheduled transfers where money is automatically moved from your chequing account to your savings account at a frequency that works for you.
As an added bonus, if you have an Innovation Savings Account, you’ll not only earn interest but also Member Rewards on your deposits. Our Savings Accounts are part of our profit sharing program, which means more money in your account every quarter.
Pros and Cons of Savings Account
At first glance, the most appealing thing about a savings account is its steady growth by earning interest. The specific interest rate for a savings account depends on the terms upheld by your financial institution. Depending on that interest rate, you can earn a decent return on your funds. While some banks and credit unions offer an industry-standard rate, others could provide more competitive returns. Use a savings calculator to estimate the total interest you can earn.
There are additional advantages of a traditional savings account, including:
Risk-free deposits: Unlike stock investments, you won’t be exposed to market volatility or unpredictable interest returns. In addition, Canada Deposit Insurance Corporation (CDIC) insurance offers another safety layer for your funds.
No age limit: Anyone with a verified Social Insurance Number (SIN) can open a savings account.
No contribution limit: There are no limits to how much you can contribute to a savings account.
No minimum investment: Other investment options may have a $1,000 minimum deposit requirement. You can deposit any amount - big or small - into a savings account.
While the benefits are clear and the saving process is quite straightforward, a few downsides are:
Taxable interest: The interest you earn through a savings account is taxable.
Fees: Some banks charge monthly fees to maintain your account. (Rest assured, our Savings Account charges no monthly maintenance fee.)
Potential withdrawal limits: Some financial institutions might limit the number (and volume) of monthly cash withdrawals.
Insufficient saving mechanism for long-term financial goals: The interest you earn on a savings account is generally too low to offset the impact of inflation.
What Is the Difference Between a TFSA and a Savings Account?
While both accounts seem great for storing your funds, which option should you choose? To make things easier, take a look at the following table, where you can compare the unique features of each.
Let’s Compare | TFSA | Savings Account |
Eligibility criteria | Canadian residents aged 18 and above (in some provinces, 19 and above) with a valid Social Insurance Number. | Anyone with a valid Social Insurance Number. |
Interest | Yes. It allows interest earned on qualified investments to grow tax-free. The rate is typically higher than that of a savings account. | Yes. A savings account generates interest on your funds per specific rate set up by a financial institution. |
Tax rules | Returns from qualified investments grow tax-free since your contributions come from after-tax income. | The interest earned is taxable. |
Balance requirements | Some TFSA investments require a $1,000 minimum deposit. | No balance requirements. |
Contribution limits | For 2025, the annual maximum contribution room is $7,000. | No limit for a maximum deposit. |
Withdrawal limits | Funds from a redeemable TFSA option can be withdrawn anytime. There may be limitations for non-redeemable options. Note: CRA rules apply on re-depositing withdrawals. | The number of withdrawal transactions might be limited by a financial institution. |
Tax deductions | No tax deduction for contributions. Any interest earned will not be taxed. | No tax deduction for deposits. Any interest earned will be taxed. |
Tax-free withdrawals | Yes. | Yes, however, any interest earned will be taxed whether you withdraw your funds or keep them in the account. |
Applicability to long-term savings | Is suitable for achieving long-term financial goals, e.g. saving for retirement. | Might be insufficient for achieving long-term financial objectives. |
Which Is Better: TFSA vs Savings Account?
If you’re still unsure about which account to open, ask yourself these questions. What are you saving for? How much do you think you’ll contribute annually? When do you expect to withdraw the funds?
Let’s start with the first one: What are you saving for? Regular savings accounts are a solid choice for short-term goals, such as holding emergency funds. They’re easy to manage, and funds are liquid and accessible. On the other hand, a TFSA is often a better option for long-term investments. It pairs well with an RRSP for retirement and allows you to compound non-taxable returns in the long run.
How much do you think you’ll contribute annually? The TFSA has an annual contribution limit of $7,000, with unused room carrying forward indefinitely. If you plan to contribute larger sums that exceed the TFSA limit, a regular savings account may accommodate those additional funds. However, if your contributions fit within the TFSA limit, it’s a far more efficient vehicle for growing your money tax-free.
Finally, when do you expect to withdraw the funds? Savings accounts are easily accessible. If you think you’ll need your money shortly, a regular savings account could be the right choice. In contrast, a TFSA is more suitable for medium- to long-term goals. While withdrawals are also flexible and tax-free, the account’s true value lies in letting your money grow over time without being taxed. It's ideal for goals that don’t require immediate access to funds.
If you are still unsure about your decision, talk to an expert to determine what account best suits your financial goals. We’re here to help!
Which Option Should You Choose?
When comparing TFSAs and regular savings accounts, it's clear that each serves a specific purpose based on your financial goals. However, for most Canadians, a TFSA offers unparalleled advantages for both short-term and long-term savings. Its tax-free growth and flexibility in withdrawals make it a superior choice over traditional savings accounts for building wealth efficiently.
Have more questions about TFSAs? Contact us today!