A big change is coming to Tax-Free Savings Accounts (TFSAs) in 2024. This change has the potential to increase the money you can invest tax-free in your account. However, if you don’t pay attention to the fine details, you could end up losing most of the benefits that your TFSA gives you. In this article, I will explore the big change coming to the TFSA in 2024 that you need to keep an eye on.
$7,000 worth of new contribution room
In 2024, the Canada Revenue Agency (CRA) will likely add $7,000 worth of new TFSA contribution room. This means that if you were 18 or older in 2009, your accumulated contribution room would jump to $95,000 from $88,000. If you turn 18 next year, you get your first $7,000 contribution room. If you turned 18 sometime between 2009 and 2024, your mileage will vary. If you turn 17 next year, you still can’t open a TFSA.
On the surface, a new $7,000 worth of contribution room is a good thing. TFSAs spare you the taxes on both dividends and capital gains. If you hold stocks like Toronto-Dominion Bank (TSX:TD) in a TFSA, you can save a lot of money.
TD Bank stock pays dividends. It also very frequently rises in price. Dividends are always taxable outside of registered accounts, and there is no way to avoid receiving them. So, the TFSA is a good place to hold dividend-paying stocks like TD. TFSAs are also good places to hold non-dividend stocks like Shopify if you trade such stocks frequently.
However, holding a non-dividend stock that you plan on owning forever in a TFSA is arguably a mistake, because such stocks do not become taxable until they are sold. If you’re going to be holding growth stocks, dividend stocks like TD, and bonds, it makes sense to prioritize the income-producing assets for your TFSA.
Why it’s risky
The fact that another $7,000 worth of TFSA contribution room is likely being added next year is good news for those who know their TFSA rules. However, it also presents certain risks. When you hear that your TFSA contribution room is increasing, you may feel eager to contribute money. That way, you can take advantage of the new space as soon as possible. However, if you contribute more money than you’re entitled to, you can end up getting taxed in your TFSA. TFSA over-contributions incur a 1% tax each month. You continue paying the tax until you withdraw the excess funds from your account.
Over-contribution is a particularly critical risk for younger Canadians. If you’re young, you may have heard that you have $88,000 in TFSA contribution room, which will grow to $95,000 next year. That’s only true for those who were 18 or older in 2009. If you turned 18 this year, you only have $6,500 in TFSA contribution room, which will rise to $13,500 next year. If you’re 18 years old and you try to contribute $88,000, you will pay quite a bit of tax on your TFSA. So, make sure to keep your TFSA contribution limit in mind. It can save you a lot of money in the long run.
