4 Reasons to Max Out Your TFSA

With the recent updates that have come to the Tax-Free Savings Account for 2019, we thought it would be beneficial to discuss the TFSA in more detail. Before we get into recent events and benefits surrounding TFSA’s, it would be worthwhile to look at the history of TFSA’s.

History of TFSA’s

Tax Free-Savings accounts started in 2009, and originally had a $5,000 per year contribution limit. Anyone that has a valid social insurance number and is 18 years of age can open a TFSA. 

Since their inception, there have been several contribution increases, as is seen in the image below. All contributions and income earned in the account can be withdrawn tax-free. 

Unlike RRSP’s, TFSA contributions are made with post-tax earning and are NOT tax deductible.

Recent Developments With the TFSA

Now into recent news, just over a week ago, Canada Revenue Agency released information saying that the TFSA Contribution limit for 2019 would be increased to $6,000.

For 5 out of the last 6 years, the contribution limit for each year was $5,500. In 2015, the contribution limit was increased to $10,000 but was then decreased the back to $5,500 the following year.

The maximum contribution that anyone is entitled to as of January of 2019 is $63,500. This limit is available for anyone that was 18 years or older in 2009.

A person is entitled to Tax-Free Savings Account contribution room in the year that they turn 18. For example, if someone turned 18 in the 2012 calendar year, they would be entitled to $48,500 as of January 2019. 

Below is a breakdown of contribution room for each year:

TFSA contribution room limit is indexed to inflation and rounded to the nearest $500. This is the reason for the increase for the 2019 calendar year. The CRA indexation increase for 2019 was 2.2%, pushing the contribution limit past the rounding point. This indexation process takes place every year. 

There is a simple formula to calculate how much contribution room is available for a person at the beginning of 2019: Unused TFSA contribution room to date + Withdrawals from the current year + Next years contribution limit. 

So why should you maximize your TFSA contribution room?

TFSA Withdrawals Can Be Re-contributed

Any withdrawals that are made from a Tax-Free Savings account, can be re-contributed in the following calendar year. Withdrawals from a Registered Retirement Savings Account (RRSP) cannot be re contributed and that contribution room is lost. 

For example, Let us say Bill had maxed out his TFSA contributions in January of 2017 of $52,000. Bill did not contribute to his TFSA in 2018. However, In June of 2018, Bill withdraws $12,000 from his TFSA. Calculating his eligible contribution room for 2019 is done as follows: $5,500 (2018 unused contribution room) + $12,000 (withdrawals in the current year) + $6,000 (2019 contribution room) = $23,500.

Just to reiterate, withdrawals can be re-contributed but only in the next calendar year not during the year of withdrawal.

Investment Gains are truly Tax-Free

Although contributions to a TFSA are done with after-tax dollars, all contributed funds grow tax-free forever. Any income that is generated, whether realized or unrealized, will not be taxed while in the TFSA or when it is withdrawn. 

Even upon death, the full market value of your TFSA is received by your beneficiary or estate completely exempt from tax. 

Contributions/Withdrawals at Any Age or Time

Once a person turns 18 they are eligible for that year’s TFSA contribution limit. Contributions can be made at any time throughout the year (as long as no over-contributions are made) and can be made regardless of age. RRSP’s, on the other hand, must be converted to RRIF at age 71. At age 72, no additional contributions to RRSPs are allowed.

Withdrawals from a TFSA can happen regardless of age or reason and are completely tax-free. If a withdrawal is done from an RRSP, that contribution room is lost, and the withdrawal is claimed as taxable income in the year of withdrawal.

TFSA Withdrawals Do Not Count as Income 

Withdrawals from a TFSA, as noted above, are completely tax-free and are not classified as taxable income. However, withdrawals from an RRSP have a minimum amount of tax withheld at source and withdrawal amount added to your taxable income. 

Having withdrawals counted towards income is significant and should be watched. During retirement when income surpasses a certain level clawbacks are triggered on Old Age Security (OAS). Clawbacks to OAS in 2018 are triggered at the $75,910 income level. If net income is higher than $122,843, OAS is completely clawed back and reduced to zero.

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