Canadians hoping to saving money after the holiday season now have the option to save more cash this year, tax free!
Great News, the Canadian Government has increased the 2019 annual contribution limit for the Tax Free Savings Account (TFSA) from $5,500 to $6,000.
What is a TFSA?
A TFSA is a Registered Savings Plan started by the government in 2009, for residents who are 18 year of age and older. It is designed to save Canadians money, tax free. Any money contributed to a TFSA, whether an investment, bond or mutual fund is Tax-Free.
If you were 18 years old in 2009, the total lifetime contribution limit for the TFSA is $63,500.
It is a flexible savings tool, allowing you to save money for any goal you want, for example Car, Home,Vacation etc. You can withdraw funds whenever you wish, for any reason without paying any taxes.
How does a TFSA Work?
Each year, from 2009 there is a contribution limit that can be made to the total TFSA.
Please see chart below:
| YEAR | Yearly Contribution Room | Lifetime Total Room |
| 2009 | $5,000 | $5,000 |
| 2010 | $5,000 | $10,000 |
| 2011 | $5,000 | $15,000 |
| 2012 | $5,000 | $20,000 |
| 2013 | $5,500 | $25,500 |
| 2014 | $5,500 | $31,000 |
| 2015 | $10,000 | $41,000 |
| 2016 | $5,500 | $46,500 |
| 2017 | $5,500 | $52,00 |
| 2018 | $5,500 | $57,500 |
| 2019 | $6,000 | $63,500 |
Here’s the way withdrawals and re-contributions work. When you take money out of your TFSA, you are permitted to re-contribute, without penalty, up to the same amount you withdrew – but not until Jan. 1st of the following year. This assumes you have no other unused TFSA contribution room available from previous years.
Where can I confirm my TFSA Room?
You can visit the Canadian Government’s CRA website and login to your: MyAccount to review your TFSA contributions, withdrawals and room.
Please note, financial institutions have until the end of February each year, to report all TFSA activity for the previous year to the government. It is a good idea to track your own TFSA transactions for accuracy.
What happens if you over contribute to a TFSA?
The government’s TFSA over-contribution penalty is 1% per month, levied on the amount of excess TFSA contributions. If you have over-contributed to your TFSA by $1,000, then the penalty will be $10 per month until you have removed the excess amount, or more contribution room becomes available.
Should I contribute to a TFSA or RRSP?
TFSAs and RRSPs both offer tax advantages to help reach savings goals. The best strategy if you can afford it, is invest in both. But if you must chose, best to speak to your Financial Advisor to get the best advise to see how they differ.
The main difference between the 2 is the timing of taxes:
- RRSP allows you to defer taxes- an advantage in your marginal tax rate is lower in retirement.
- With a TFSA, you have already paid tax on the money you contribute- an advantage if your marginal tax rate is higher when you withdraw the money, tax free.
The Top differences between a TFSA and RRSP are:
- You need earned Income to contribute to an RRSP but not to a TFSA.
- An RRSP is intended for retirement savings as a TFSA can be any type of savings goal, even short term.
- RRSP contributions are tax deductible and TFSA are not. With an RRSP, you can deduct your contribution from your income on your tax return. You cannot deduct a TFSA contribution on your tax return.
- You pay taxes on your RRSP withdrawals as the contribution was made with pre-tax dollars. TFSA withdrawals are tax free because your made the contributions with after-tax dollars.
- In the year you turn 71, you cannot make any further RRSP Contributions and must convert your RRSP to a RRIF. With a TFSA you do not have to stop contributions at a specific age or close the account.