8 Tax-Free Savings Accounts (TFSA) 2025: Maximize Your Savings & Avoid Taxes
Looking for a tax break from the federal government?
There are several available. It’s just a matter of choosing one that fits your situation and helps you achieve your financial goals.
A tax-free savings account (TFSA) can help you both save on taxes in the near term and fund future needs in the long term.
The following are several types of TFSA that can help you grow your money for the future.
1. Traditional IRA
Individual retirement accounts have been popular for decades. Traditional IRAs offer benefits such as deferred taxes on contributions and investment earnings. You don’t pay income tax on the money until you withdraw money from the account.
Like most tax-advantaged retirement accounts and plans, IRA traditional accounts come with some strings attached:
- As of 2025, annual contributions are limited to $7,000 a calendar year by the Internal Revenue Service or $8,000 if you are age 50 or over by year’s end. Subsequent-year contribution limits are adjusted over time for inflation.
- Your ability to deduct traditional IRA contributions may be reduced if you are covered by a retirement plan at work and exceed certain income limits.
- You and your spouse combined cannot deduct more IRA contributions than the combined amount of your taxable incomes.
- Typically, if you take money out of the plan before the 59 1/2 age limit, those distributions will be subject to ordinary income tax plus a 10% penalty.
How It Helps
A traditional IRA offers tax-free growth by deferring taxes on contributions and investment earnings until retirement. It may also allow the account holder to benefit from being in a lower tax bracket when the money is withdrawn in retirement.
2. Roth IRA
The difference between a Roth IRA and a traditional IRA boils down to whether you want to pay taxes now or later.
Key conditions for Roth IRAs are:
- Unlike traditional IRAs, Roth IRA contributions are not tax-deductible. Money in a Roth IRA grows tax-free and can be withdrawn without taxes once you reach age 59 1/2.
- Roth IRA contributions can be withdrawn at any age, but investment growth on those contributions will be subject to a 10% penalty if withdrawn before age 59 1/2.
- As of 2025, Roth IRA contributions are limited to $7,000 a year or $8,000 if you are 50 or older by the end of the year. Contribution limits are inflation-adjusted.
- The amount you can contribute might be reduced if you exceed certain income limits.
How It Helps
While a Roth IRA does not allow you to deduct contributions, your after-tax dollars can grow tax-free and be withdrawn without taxes once you reach age 59 1/2. By taxing contributions rather than withdrawals, a Roth IRA allows people in a fairly low tax bracket to pay taxes at that low rate rather than at a potentially higher rate once they reach retirement age.
3. Traditional 401(k) Retirement Plan
A traditional 401(k) plan is a benefit offered by many employers. Like a traditional IRA, it gives you a deduction on pre-tax money you contribute to the plan, though withdrawals from the plan in retirement are subject to income tax.
Key conditions:
- As of 2025, eligible participants can contribute up to $23,000 (or $30,500 if they are aged 50 or over). Contribution limits may be inflation-adjusted.
- Some employers add a contribution on behalf of plan participants.
- Contributions and investment gains are tax-deferred and can be withdrawn at ordinary income tax rates any time after the beneficiary reaches age 59 1/2.
- Withdrawals prior to that may be subject to a 10% tax penalty in addition to ordinary income tax.
How It Helps
A traditional 401(k) plan offers similar tax benefits to a traditional IRA. Taxes are deferred on both contributions and investment gains. However, it offers some advantages over IRAs.
The contribution limits are higher, and some 401(k) plans kick in contributions on behalf of employees. Most 401(k) plans come with investment features such as free retirement planning tools and extensive investment option menus.h as free retirement planning tools and extensive investment option menus.
4. Roth 401(k)
Though not offered by all 401(k) plan sponsors, those that allow Roth accounts give participants the opportunity to benefit from the same tax characteristics as a Roth IRA but with the higher contribution limits of a 401(k).
Key conditions:
- As of 2025, eligible participants can contribute up to $23,000 (or $30,500 if they are age 50 or over). Contribution limits may be adjusted over time for inflation.
- Some employers make contributions on behalf of plan participants.
- Contributions are not tax-deductible, but qualified investment gains are tax-deferred, and withdrawals after age 59 1/2 are not subject to income tax.
- Withdrawals of investment earnings prior to age 59 1/2 may be subject to a 10% tax penalty in addition to ordinary income tax.
How It Helps
For people in relatively low income tax brackets, a Roth 401(k) can create the same benefit as a Roth IRA of paying taxes now rather than after age 59 1/2. Roth 401(k)s allow participants to contribute at higher levels than Roth IRAs.
5. In-state 529 Education Savings Plan
These plans are intended to be used for educational expenses.
Here are some key terms of these plans:
- Contributions are subject to annual gift tax limits.
- Contributions are not tax-deductible, but investment earnings are not taxed if the money is ultimately used for eligible education expenses.
- In-state 529 plans may offer additional state income tax breaks.
How It Helps
Capital gains are exempt from tax, making 529 plans most beneficial for people who start saving for educational expenses early. Residents of states with high income taxes may benefit from investing in an in-state 529 plan.
6. Coverdell Education Savings Account
The Coverdell Education Savings Account used to be the main way to save for college before 529 plans. The tax treatment is similar, but they are subject to different conditions:
- Money deposited into a Coverdell Education Savings Account isn’t deductible, but investment earnings and withdrawals for eligible education expenses are tax-free.
- Total contributions to Coverdell accounts on behalf of a beneficiary can’t exceed $2,000 per tax year.
- When the account is established, the beneficiary must be under 18 or designated as a special needs beneficiary.
How It Helps
It allows parents to save tax-free money for college when the funds are used for eligible education expenses. set up.
7. Health Savings Account (HSA)
HSAs offer triple tax savings on qualified investments. Contributions are tax-deductible, money grows tax-free, and withdrawals are tax-free when used for qualified medical expenses. You can also accumulate money in an HSA over time, supplementing your retirement nest egg for use toward future medical expenses.
Conditions include:
- You must have a high-deductible health plan (HDHP) to participate in an HSA with tax-free savings.
- Annual contributions for 2025 are limited to $4,300 if you have HDHP self-only coverage and $8,550 if you have family coverage. These limits are adjusted periodically for inflation.
- Withdrawals can be made at any time and are not taxed when used for eligible medical expenses.
How It Helps
By exempting both contributions and investment earnings from income tax, HSAs provide important tax-free savings account benefits. Because you can accumulate money over time for future medical expenses, HSAs can help you save for near-term medical expenses and supplement your retirement savings.
8. Flexible Spending Arrangement (FSA)
FSAs allow money to be contributed, invested, and withdrawn for medical expenses without taxes. Unlike HSAs, they are designed to be used primarily for expenses occurring in the same year.
Key rules include:
- Employees can contribute through payroll deduction, and employers may contribute on behalf of employees.
- For 2025, employee contributions are limited to $4,300. Annual contribution limits are periodically adjusted for inflation.
How It Helps
People who don’t itemize deductions may benefit from having money tax-free to pay for medical expenses. There is a benefit to having investment earnings free from taxes, though this benefit is limited by the generally short-term nature of these accounts.
Which Banks Have the Best Savings Account Rates?
Savings rates are still some of the highest we’ve seen in years, but if you’re using a traditional, big-name bank, you’re missing out on these rates.
Here are our top picks for those who want to earn the highest interest on their savings.
Next Steps: Start Saving Money on Taxes This Year
Any of the above tax-advantaged savings plans might be useful at tax time, but it’s best to consider them throughout the year.
When you contribute regularly, you have more useful deductions, a lower tax burden, and more money saved to one of these tax-advantaged plans throughout the year.
Here are some other steps you can take to start saving on taxes:
- Do some financial planning to determine what major expenses you face in the future
- Determine your eligibility for tax-free savings
- Open an emergency fund with a savings or fixed-rate CD at your financial institution and put your disposable income to work
- Decide whether to use an independent or employer-sponsored retirement account
- Use investment accounts to help grow your savings for long-term needs like retirement investment income
- Compare brokerage investment accounts or robo-advisors for long-term investment advice.
