Investors that hold a Tax-Free Savings Account (TFSA) likely know that contribution limits are going up by $6,000 next year. For investors who have always been eligible and never invested in a TFSA, that means their cumulative limit will be $69,500 in 2020. However, that doesn’t mean that everyone’s limit is going to be that amount. The TFSA doesn’t have many requirements, but in order to accumulate room, an individual needs to be at least 18 years of age.
That means for investors who are in their mid-20s, their contribution room will look a little different. The TFSA launched in 2009, which means that if you were at least 18 years of age that year, then you’d be eligible for the maximum contribution room. That puts anyone who is under 28 years of age today with a lower TFSA limit.
And since the contribution room is not always the same each year, younger investors will have to look back at the years that they’ve been eligible to see what their contribution limit is. When in doubt, however, investors can always call the Canada Revenue Agency (CRA) and confirm what their available room is as of the beginning of the year. If you have My Account setup with the CRA, then you can also login and check your limit that way as well.
Why knowing your limit is important
Contributing to a TFSA can be too easy, and you won’t get a warning from your financial institution telling you if you’re overcontributed. Since it’s possible to have TFSAs with different brokerages, you could contribute to more than one account. That’s why individuals have to stay on top of their contributions and know how much room they have left, because by the time you realize you’ve overcontributed, you may already be facing penalties.
The CRA assesses a penalty of 1% on the amount you’ve overcontributed per month. It doesn’t matter if you contribute more than $6,000 in 2020, but the CRA will look at your cumulative limits to see if you’ve gone over.
A simple strategy is the safest when it comes to a TFSA
Having multiple TFSAs can be a big headache later on for investors. That’s why just using one account may be the best route. And investing in a top dividend stock like Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) is an easy investment that you can just buy and forget about.
The bank stock may not have generated much in the way of capital gains for investors, with returns of just 12% over the past five years, but it’s Scotiabank’s dividend that makes it an appealing buy for long-term investors.
Currently, the dividend is yielding around 4.9%. That’s a very high payout for a top bank stock in the country, and what makes it even better is that the company has been raising its dividend payments over the years.
Last year, the stock was paying investors a quarterly dividend of $0.85, and that has since risen to $0.90 for an increase of 5.9%. It’s a modest rate of growth, and that also makes it very sustainable as well. If Scotiabank were to continue at that rate of increase for 10 years, its dividend payments could reach $1.59 per share — a nearly 80% increase from what they are today.
While it’s no guarantee that Scotiabank will continue raising its dividends, bank stocks are generally safer bets when it comes to dividends and increasing their payouts. That’s why investing in Scotiabank can be a good way to set and forget your TFSA.
