Yes, you can lose money in a TFSA. The Tax-Free Savings Account is a container, not an investment. What happens to your balance depends on what you put inside it.
When your balance can fall
- Stocks and ETFs: prices move every day. If you hold an index ETF and the market drops 20%, your TFSA drops with it.
- Crypto, mutual funds and bonds: all of these can lose value.
- Single stocks: a company can fall sharply, and it can fail.
When it cannot
A TFSA that holds a savings account or a GIC will not lose principal. Deposits at member institutions are covered by CDIC up to $100,000 per category, which is separate for different registered account types.
The tax rule that works against you
Losses inside a TFSA cannot be claimed against your other income, unlike losses in a regular taxable account. The flip side is that gains are not taxed. Also, if you withdraw after a loss, you get back contribution room only the following January, not the lost amount.
Over-contributing costs money too
If you put in more than your contribution room, the CRA charges a tax of 1% per month on the excess for as long as it remains. Check your room in your CRA My Account before you contribute, especially if you moved money between banks or withdrew during the year.
How to lower your risk
- Decide when you need the money. Short timeline means savings or GICs. Long timeline means more stocks.
- Use broad index funds so one company cannot sink you.
- Do not put your emergency fund in volatile investments.
- Keep contributing through ups and downs.
This is general information, not financial or tax advice. Ask other Canadians how they use theirs in the Smart Money Watch community.
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