The Canada Revenue Agency (CRA) has announced that the Tax-Free Savings Account (TFSA) contribution limit for 2025 will remain at $7,000, consistent with the 2024 limit. This decision reflects current inflation rates and continues to offer Canadians substantial opportunities for tax-free savings.
Understanding the TFSA
Established in 2009, the TFSA allows Canadian residents aged 18 and over to save and invest money without incurring taxes on the income earned within the account. While contributions are not tax-deductible, any growth—be it interest, dividends, or capital gains—is tax-free, even upon withdrawal. Moreover, unused contribution room carries forward indefinitely, providing flexibility in managing your savings.
Registered Retirement Savings Plan (RRSP)
The RRSP is designed to encourage retirement savings by offering tax-deferred growth. Contributions are tax-deductible, effectively reducing your taxable income for the year in which the contribution is made. Funds within an RRSP grow tax-free until they are withdrawn, at which point they are taxed as income. For 2025, the contribution limit is $32,490 or 18% of your previous year’s earned income, whichever is less, plus any unused contribution room from prior years.
First Home Savings Account (FHSA)
Introduced in 2023, the FHSA aims to assist first-time homebuyers in saving for a down payment. It combines features of both TFSAs and RRSPs, offering tax-deductible contributions and tax-free withdrawals when funds are used for qualifying home purchases. The annual contribution limit is $8,000, with a lifetime maximum of $40,000. Unused contribution room can be carried forward, and if the funds are not used for a home purchase, they can be transferred to an RRSP without affecting RRSP contribution room.
Choosing the Right Account
Selecting between a TFSA, RRSP, and FHSA depends on your individual financial goals:
TFSA: Ideal for short-term savings, emergency funds, or supplementing retirement income due to its flexibility and tax-free withdrawals.
RRSP: Best suited for long-term retirement savings, especially if you’re currently in a higher tax bracket and anticipate being in a lower bracket during retirement.
FHSA: Designed specifically for first-time homebuyers aiming to save for a down payment, offering both tax-deductible contributions and tax-free withdrawals for qualifying home purchases.
Understanding the distinct advantages of each account type can help you make informed decisions aligned with your financial objectives. For more info and to see if you’re eligible to contribute to these accounts, you can book a consultation at jaaccounting.ca/contact_us