Tax-Free Savings Accounts (TFSA) are a flexible vehicle for accumulating savings on a tax-free basis. Contributions must be made from after-tax sources, however, all growth achieved within the account including any eventual withdrawals are considered tax-free.
The annual TFSA limit for 2019 has now been increased to $6,000. However, the annual limit is only applicable if you’ve already maximized your allowable TFSA contributions overtime. One of the great features of the TFSA is that contribution room is carried forward each year if unused.
Since 2009, Canadian residents have been able to contribute the following amounts:
| 2009 | $5,000 |
| 2010 | $5,000 |
| 2011 | $5,000 |
| 2012 | $5,000 |
| 2013 | $5,500 |
| 2014 | $5,500 |
| 2015 | $10,000 |
| 2016 | $5,500 |
| 2017 | $5,500 |
| 2018 | $5,500 |
| 2019 | $6,000 |
| Total Cumulative Room | $63,500 |
Someone who has never contributed to a TFSA could contribute up to $63,500 to their account in 2019.
Another unique feature of the TFSA is that any amounts withdrawn from the account will be added to available contribution room beginning in the following tax year.
If you’ve made several contributions and withdrawals from your TFSA over time, then determining your available contribution room requires care to ensure that you don’t over contribute in any given year. For this purpose, we keep track of available TFSA room on behalf of our clients. However, if you need help in determining your current TFSA room then be sure to register for CRA’s MyAccount.
TFSA vs. RRSP
Contrary to popular belief, TFSA aren’t necessarily better than RRSPs (Registered Retirement Savings Plans) which offer tax-deductible contributions but fully taxable withdrawals. In fact, TFSAs and RRSPs are tax-neutral. Meaning, if you are subject to the same tax rate at the time of the contribution and withdrawal, then all things being equal the after-tax amount you can accumulate within a TFSA and RRSP will be identical.
The account that will provide the most financial benefits (if you can’t do both) will be influenced by your intended use of the funds, current tax rate (or income level) and where we might expect your taxable income to be in the future. Flexibility is a notable advantage of the TFSA.
For assistance with maximizing your available contributions, please feel free to contact us. For some tips on how best to consistently grow your wealth, be sure to read Common Sense Path to Long-Term Wealth.