TFSA limits lower in 2016, but past contribution room remains
Liberals have rolled back tax-free savings account contribution limits.
Don’t panic. Liberals may have rolled back the Conservatives’ increase for tax-free savings account limits — but you aren’t losing any contribution room that has already accumulated.
On Jan. 1, the annual contribution limit for tax-free savings accounts will be $5,500, instead of the $10,000 the previous government had implemented for 2015.
The rules around the accounts allow the contribution limits to accumulate starting from 2009 for each year during which a person turned or was 18 years of age, held a social insurance number and was a resident of Canada.
The limit for anyone opening an account today would be $41,000 and will rise by another $5,500 on Jan. 1. Someone opening an account after Jan. 1 would be able to contribute $46,500.
The Liberals ran on a campaign pledge to roll back the $10,000 annual contribution limit to $5,500 and then index future increases.
Future annual increase will be pegged to inflation — rounded to the nearest $500 increments. Assuming an average two per cent inflation rate, the contribution limit will only hit $10,000 in the year 2045 under the current changes.
The Conservatives, who first created the tax-free accounts and then pledged the increase to a $10,000 annual limit last year, say the rollback will disproportionately harm seniors as they look to protect their savings for retirement.
Statistics from the Canada Revenue Agency show that fully 25 per cent of all tax-free savings account holders in 2013 — the most recent year for which data is publicly available — were over the age of 65.
The same database also shows 32 per cent of seniors hit the maximum contribution that year; the annual contribution limit in 2013 increased to $5,500.
It’s not until 2017 that statistics on how many people reached this year’s $10,000 limit are set to be revealed, but the rate has been on a downward trend since the beginning.
11 million people with TFSAs
In the first year of the accounts’ creation in 2009, nearly five million people opened an account and 64 per cent of them deposited the then maximum $5,000 over the course of the year.
Nonetheless, the government does say lowering the annual contribution limit to $5,500 from $10,000 is expected to increase its tax revenues by $80 million next year. A look at the numbers suggests that money will be the sum of many small amounts.
The interest earned on a regular savings account is declarable income and subject to the tax appropriate for your income level.
The contribution limit being lowered by $4,500 next year could mean an additional tax bill of $67 for the year on someone earning up to $45,000 a year — up to about $150 for those earning more than $200,000 and subject to the new tax bracket of 33 per cent.
That’s assuming a rate of return of 10 per cent on the tax-free savings account, which is more than most financial advisers would suggest planning on, especially for seniors who are recommended to invest conservatively in order to protect their savings.
By James Fitz-Morris CBC News Dec 11 2015.