According to the Canada Revenue Agency, only on in five TFSA holders have maxed out their contributions. That’s a tragedy, especially considering Canadians from all walks of life have figured out how to regularly fill their TFSAs.
For example, nearly 20% of Canadians making $20,000-$25,000 per year have already hit their TFSA contribution limits, roughly the same percentage as those earning between $80,000 and $90,000 per year. To be sure, it’s easier to save more if you have more disposable income, but the data suggests that it’s possible across the income curve.
If you haven’t maxed out your TFSA contributions, you’re not alone, but now is your chance to correct this mistake. Here’s where to begin.
What to do
The first step is to understand how much you’re actually able to contribute to your TFSA. The important thing to remember is that you can never lose your contribution room. That means if you’ve never contributed to your TFSA, you can immediately deposit $63,500 — that’s the cumulative amount of money you could have contributed since 2009 — the year the TFSA was introduced.
If you’ve already contributed to your TFSA, you’ll need to do some math. From 2009 to 2012, the contribution limit was $5,000 per year. In 2013 and 2014, it was upped to $5,500 per year. In 2015, it was temporarily increased to $10,000, only to drop to $5,500 again from 2016 to 2018. This year, the contribution limit was changed yet again to $6,000 per year. Add all those numbers up, and you’ll get $63,500.
All you need to do is determine how much you’ve contributed to your TFSA during your lifetime. If you’ve cumulatively contributed $20,000, then you may still have more than $40,000 in potential room. Withdrawals open more space. If you withdrew $5,000 last year from your TFSA, you can contribute an additional $5,000 this year.
With so many opportunities to contribute more than the annual maximum, it’s no wonder few TFSA holders have actually hit their total contribution limits. Yet when it comes to investing, this is as close as it comes to free money. And due to the flexibility of TFSA plans, it’s almost a crime not to use one.
Where to go
Want to incentivize yourself to save more in your TFSA? Canadian Utilities is a perfect example of how powerful your contributions can be.
Due to its regulated-utility business model, Canadian Utilities stock is incredibly stable. During the financial crisis of 2008, for example, shareholders exited with a profit. Plus, the company pays a 4.5% dividend, a payout that has increased every year for more than 30 years. It’s difficult to find this sort of stability on the TSX, but Canadian Utilities continues to deliver. And with a TFSA, all of these capital gains and dividends are tax free.
Canadian Utilities isn’t the only stock that can consistently create wealth through age 50 and beyond, but it’s a great starting point. Owning reliable companies like this can increase your confidence that each contribution will make a difference in your financial future. Now get to work!
