Do you know what a TFSA contribution limit is? If you live in Canada, then this is something that could be very useful to you. To really understand TFSA contribution limits, you have to understand what TFSAs are all about.
These accounts allow you to save money without having to pay any taxes on the interest earned or the withdrawals you make. Sounds like a pretty cool investment tool, doesn’t it?
But there are limits to how much you can save in your TFSA account. There are other important information that you need to keep in my mind if you are interested, like contribution rooms and contribution tracking.
We will tell you all you need to know in this article.
What is a TFSA?
These accounts allow you to save money without having to pay any taxes on the interest earned or the withdrawals you make. TFSAs are available to anyone over the age of 18 who is a Canadian resident.
For example, if you wanted to set aside money for your child’s education, you could use a TFSA to do that. Or if you have big plans for retirement but don’t have an employer-sponsored pension plan, a TFSA would be perfect for that as well.
When it comes time for filing your taxes, there’s no need to include your TFSA balance in your tax return because it is already tax-free!
What Is a TFSA Contribution Limit/Room?
For those who don’t know what a contribution room is, it is a concept that is easy to understand. As a result of the immense tax savings possible with a TFSA, the Canada Revenue Agency (CRA) limits the total amount you can contribute to your account (in other words, TFSA contribution limit). That is why contribution rooms exist; to protect TFSAs from abuse.
How Much Can I Contribute to My TFSA?
Here is precisely how you go about it:
2009, 2010, 2011, 2012: $5,000 per year
2013, 2014: $5,500 per year
2016, 2017, 2018: $5,500 per year
2019, 2020, 2021, and 2022: $6,000 per year
How Can I Track My TFSA Contribution Limit?
Keeping track of your TFSA contributions is super important. If you contribute more than your current limit, you’ll be subject to a monthly tax of 1 percent on the excess amount for each month that it stays in your TFSA. There may also be significant penalties on earnings or increases in value attributed to deliberate contributions that are excessive.
You can check your TFSA contribution limit from CRA’s My Account. Keep in mind that any contributions made or withdrawn from a TFSA in the year before will not be reflected in your contribution room in the present year till February comes to a close.
How to Know My TFSA Contribution Room
There are two ways to find out how much TFSA contribution room you have:
- Access the Canada Revenue Agency (CRA) My Account website.
- Call the Tax Information Phone Service (TIPS) at 1-800-267-6999.
You can also calculate your contribution room for the current year using this CRA worksheet.
Always endeavor to keep good records, because there are penalties for contributing too much. You can use this CRA worksheet to calculate your contribution room for the current year.
As a general rule, add up the three amounts below to calculate your TFSA contribution room:
- Previous years’ contributions that weren’t used
- Contribution limit for the present year
- Previous years’ withdrawals
Where Can I Find My TFSA Contribution Room Information?
Your TFSA contribution room information and its limit can be found by using one of the following services:
- My Account
- Represent a Client if you have an authorized representative
- Tax Information Phone Service (TIPS) at 1-800-267-6999
You can also ask for a TFSA Transaction Summary that shows the information that they received from your TFSA issuer about your contributions and withdrawals.
You must keep records of your TFSA transactions to ensure that you do not go past your TFSA contribution room. The government will also keep track of an individual’s contribution room for each eligible individual based on information provided annually by the TFSA issuers.
How to Authorize a Representative
You can authorize a representative (such as your spouse or common-law partner, tax preparer, or accountant) to get information about your tax affairs and give the government information on your behalf. The government accepts information from and provides information to your representative only after they are satisfied that you have authorized them to do so through My Account for Individuals on the website.
Your authorization will stay in effect until any one of the following situations applies:
- It is cancelled by you or your representative
- It reaches the expiry date you choose
- They receive notification of your death
You or your representative can cancel the consent you gave by telephone or in writing.
How Will TFSA Receive My Information?
By the last day of February of the following year, all issuers are required to electronically submit a TFSA record for each individual who has a TFSA.
If you disagree with any of the information on your TFSA Room Statement, or TFSA Transaction Summary, including dates and amounts of contributions, withdrawals, or limit that your TFSA issuer has provided, contact your TFSA issuer. If any information initially provided by the issuer regarding your account is incorrect, the issuer must send the government an amended record so that records can be updated.
How Can I Open a TFSA Account?
You can have multiple TFSAs at any given time, but the total amount you contribute to all your TFSAs cannot be more than your available TFSA contribution room limit for that year.
To open a TFSA, you have to do both of the following:
- Contact your financial institution, credit union, or insurance company (issuer).
- Provide the issuer with your social insurance number and date of birth so the issuer can register your qualifying arrangement as a TFSA. Your issuer could ask for supporting documents.
TFSA Withdrawal Rules
You can withdraw money from your TFSA whenever you want, as long as the underlying investment isn’t subject to lock-in rules.
Your withdrawal is 100% free of any tax, so it doesn’t affect income-based benefits like the Canada Child Benefit, the Canada Workers Benefit, the GST/HST Credit, the Age Credit, Old Age Security, or the Guaranteed Income Supplement and employment insurance benefits.
The next year after withdrawing from your TFSA, the amount you withdrew is reversed back to your allowed TFSA contribution room. So, if you withdraw $10,000 from your TFSA in 2021, as of January 1, 2022, you will have an additional $10,000 of contribution room left.
Pros and Cons of TFSAs
- Flexibility: This tax-free saving plan lets you withdraw the money at any time without penalty and this will earn you less interest in the account.
- Tax-free income: Opening an account in this investment plan allows you to earn money in a tax-free way. The funds contributed to your TFSA account earn some interest and the interest is not taxed.
- Earn investment income: The capital gains, dividend income, and interest that you earn within this account are not subjected to any tax.
- Carry forward the contribution limit: Each account holder is not supposed to contribute more than $5 000 per year and this limit can add up over time regardless of whether the money was contributed or not. This amount is forwarded to the following year’s tax system.
- Yearly contribution limit: Each year TFSA account holder has to contribute a maximum of $5000 and this limit adds up over time whether the money was contributed or not.
- Opening delays: Sometimes there are account delays forcing a potential TFSA account holder to wait for long before the account becomes active. This primarily happens with the TFSA account type.
- Penalties: Any over-contribution attracts a penalty of 1% of the highest amount you contributed in the month and for each and every month you have over-contributed.
- No creditor protection: TFSA assets are not safe from the creditors in case of bankruptcy or after the financial judgment that resulted from any legal proceedings against the account holder.
Things to Consider When Contributing to or Withdrawing from TFSAs
Always keep the following in mind in order to make the best use of your TFSA and avoid penalties:
- Don’t add back withdrawals in the same calendar year
- Over-contributions are promptly punished
- You don’t need to file tax returns if you are a resident of Canada
- You can transfer your TFSA from one financial institution to another without it being considered a withdrawal, as long as the financial institution does the transfer on your behalf
- Management fees are not withdrawals
TFSAs vs. RRSPs
The TFSA vs RRSP debate is an interesting one. As opposed to a registered retirement savings plan (RRSP) account which is specifically for retirement savings, a TFSA can be used to save for anything.
The tax-free savings account differs from a registered retirement account in two other main ways:
- Deposits made to an RRSP are removed from your taxable income. Deposits into a TFSA aren’t tax-deductible.
- Retirement plan withdrawals are considered income when considering tax laws.
TFSA also differs from retirement accounts like Roth IRA Canada.
It’s no surprise that TFSAs are popular choices among investors who want to preserve their wealth and reduce the amount of taxes they have to pay, but you have to be careful and follow the rules of using this investment tool.
As long as you know your contribution room limit, and you follow rules that govern all TFSA-related activities, you’re on the right track.
Always remember that any excessive contribution attracts a potentially steep penalty of 1% of the highest amount you contributed in the month and for every month you have over-contributed. So, tread carefully as you indulge in TFSAs.
Capital Losses Are Not Deductible
TFSA withdrawals are tax-free, which is awesome. But it’s important to remember that because they’re tax-free, capital losses within your TFSA will not be deductible.
You Can Have Multiple TFSAs?
You can open additional TFSAs at different financial institutions. Each account will contribute towards your overall TFSA contribution limit, so make sure you don’t go over.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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