Tax-Free Savings Accounts (TFSAs) are incredible. There’s simply no faster way to improve your financial wellbeing. With a TFSA, you can permanently shield your capital from taxes, both as it grows and when it’s withdrawn.
Today, millions of Canadians have a TFSA. Each year, that number grows. Yet TFSA holders often make mistakes that are easily avoidable with a little knowledge and awareness.
At the start of the year, it makes sense to spend a few minutes reviewing rule changes as well as how TFSAs are being used across the country.
Another year at $6,000
The TFSA contribution limit for 2020 has been set at $6,000, the same as the year before, which means that this year, you can contribute a minimum of $6,000 to your TFSA. In reality, however, you may be able to contribute much more.
Unused contribution space from previous years roll forward. So if you didn’t contribute at all in 2019, you can add $6,000 to your 2020 contribution limit.
If you’ve never contributed to a TFSA, you may be eligible to contribute up to $69,500 this year, the sum of each year’s contribution limit since the founding of the TFSA.
Here’s how to do the math.
First, figure out which year you turned 18, as contribution room only begins to accumulate on this year. Then simply add the contribution limit of that year to each subsequent year to find your TFSA lifetime contribution maximum.
The limit was $5,000 from 2009 to 2012, moving to $5,500 for 2013 and 2014. It jumped to $10,000 for 2015, but fell back to $5,500 from 2016 to 2018. As mentioned, the limit was $6,000 in 2019, remaining the same in 2020.
Canadians are getting smarter
If you’re not contributing to your TFSA, get started immediately. In recent years, millions of Canadians have accelerated their participation.
The Canada Revenue Agency recently released TFSA data from the 2017 contribution year. That year, Canadians held $277 billion in TFSAs, with the average person having $19,633 in their account.
Fortunately, total TFSAs grew 18.8% from 2016 levels. I wouldn’t be surprised to see continued gains when data for the 2018 contribution year is released in late 2020.
There’s only one concern: unused TFSA contribution room in 2017 averaged roughly $31,000, up from around $27,650 the year before. So TFSA assets are increasing, but Canadians are still unable to keep up with their theoretical contribution maximums. Don’t be content with a rise in your TFSAs value; be sure to contribute as much as possible.
People still make this classic mistake
According to industry journal Investment Executive, many Canadians continue to over-contribute to their TFSAs. “The Canada Revenue Agency (CRA) imposes a penalty of 1% a month on an excess amount over the limit,” it warns.
This mistake usually involves a lack of awareness for contribution rules. Always pay attention to the new annual maximum for the current year while also independently calculating what your lifetime maximum should be.
Also, make sure to understand how withdrawals open up new contribution room. If you withdraw $500 from your TFSA, an additional $500 in contribution room is created for the following year. Canadians often make the mistake of thinking new contribution room is opened up in the current year.
The costs of over-contributing are steep. Keep track of your contributions and withdrawals, and freshen up your knowledge of the rules at the start of each new year.
