It's official! The annual contribution limit for the Tax-Free Savings Account (TFSA) has been increased to $6500 for 2023. This amount is up from the $6000 limit that was set from 2019-2022.
The TFSA was created in 2009 and the annual contribution limit is the same for everyone. The maximum contribution amount for someone who has never contributed to a TFSA, and has been eligible since its introduction in 2009, is now $88,000.
To be eligible to open and invest through a TFSA, you must be 18 and have a valid social insurance number (SIN). Your allowable contribution room starts to accumulate at the age of 18.
If you have more than one TFSA or have taken money out in previous years, you can find out your contribution limit online through your Service Canada account. For those that have withdrawn money from their TFSA, the amount withdrawn is added back to their contribution room the following year. The formula is: Unused TFSA contribution room to date + total withdrawals made in the current year + next year’s contribution limit = TFSA contribution room at the beginning of next year.
A TFSA is a registered account and therefore lets you grow your money tax sheltered; thereby paying no tax on investment growth in the account. However, unlike an RRSP, you will not receive a tax deduction or refund when you invest in a TFSA. But, on the flip side, withdrawals from a TFSA are tax-free.
TFSA’s are much more flexible, meaning you can take out money for anything. Furthermore, unlike the RRSP, you do not lose your contribution room if you redeem money, the only catch is you must wait until the following year to re-contribute otherwise it may be counted as a double contribution and result in a penalty.
A TFSA is also an excellent savings vehicle for seniors who can no longer invest in an RRSP. TFSAs do not expire whereas RRSPs must be converted to a Registered Retirement Income Fund (RRIF) by Dec 31 of the year you turn 71.
The one thing you don’t want to do is over-contribute to your TFSA, if you do a penalty of 1% per month will be charged on the over-contribution. For this reason, I normally recommend to only have one TFSA account, that way you can keep track of your deposits and withdrawals and avoid letters from the CRA. If you have any questions or want more information, please don’t hesitate to reach out.
Mani Fenili (December 14, 2022)
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