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In 2013 the TFSA Contribution Limit Increases to $5500





On November 26, the Harper government announced that starting January 1, 2013 they will increase the Tax Free Savings Account (TFSA) limit by $500 to $5500. About 30% of Canadians who have a Tax Free Savings Account max out their annual contributions, so this news should be welcomed by these TFSA maximizers.

This is the first time the government increased the TFSA contribution limit. Upon the initiation of the TFSA, the government announced that they would make the $5000 annual contribution limit indexed to inflation using the Consumer Price Index (CPI) data from Statistics Canada. The inflation amount is rounded to the nearest $500. In 2013, this is the first year that the amount exceeded the threshold, hence the increase to $5500 for the annual Tax Free Savings Account contribution limit.

Any Canadian citizen aged 18 or over is eligible to open up a TFSA since 2009. For those who have not opened up at Tax Free Savings Account yet, the amount you are eligible to contribute is now $25,500 in 2013. The TFSA is highly recommended (TFSA vs RRSP) for young individuals who are currently in a low income tax bracket and are expected to increase their income in the future.

Advantages of a TFSA

I’m most likely preaching to the converted, but some of the advantages of the TFSA include:

  • Interest, capital gains, and dividend income earned within a Tax Free Savings Account are not subject to tax;
  • Income earned in a Tax Free Savings Account does not affect the eligibility for certain federal and provincial benefits and credits; and,
  • Unused contribution room can be carried towards future years.

How Much Contribution Room?

This link will help determine how much TFSA contribution room you have.

What You Can Hold in a Tax Free Savings Account

Although the awareness is increasing that the Tax Free Savings Account doesn’t necessarily have to be a savings account, many Canadians are still using the Tax Free Savings Account as a savings account.

The types of investments that can be included in a Tax Free Savings Account include:

  • Cash (e.g. savings account)
  • Mutual funds
  • Bonds
  • Guaranteed Income Certificates
  • Equities (stocks, exchange traded funds, etc.)

Where You Can Get Money to Put in your Tax Free Savings Account

In Kind Contributions:

This is probably the easiest way to contribute to your Tax Free Savings Account because the money is already there but you will obviously have to take a capital gains hit when transferring your non-registered equities into a Tax Free Savings Account if the fair market value exceeds your original purchase price.

However, if the equity that you have in your non-registered portfolio is similar in price to what you bought it as, and you still want to hold on to it (e.g. blue chip dividend stock), it might be a good idea to consider switching it to your Tax Free Savings Account.

In addition, if the fair market value is lower than your original purchase price, you will not be able to claim a capital loss when transferring equities in-kind from a non-registered portfolio to the Tax Free Savings Account.  In this case, best to sell the stock to claim the capital loss, then contribute the cash to your TFSA.

Save It

$5500 per annum equals to about $460 a month of savings. Although it may seem difficult to do, if you automatically deduct it from your pay cheque and “pay yourself first” you probably will not notice that you’re saving a big chunk of money per month. I believe most individuals reading Million Dollar Journey have no difficulties saving the extra $42 a month difference from 2012 to 2013 Tax Free Savings Account contributions.

How to Increase your Tax Free Savings Account Contribution Room

Most people probably already know this by now, but lets say you withdraw $1000 from your TFSA that already had $20,000 in it this year. If you withdraw $1000 and then wait until the following year, you will be allowed to contribute $6500 ($1000 + $5500).

Withdrawing from your TFSA creates additional contribution room that is equal to the amount that is withdrawn, but this is only the case for deposits in future years.

Basically, this makes the Tax Free Savings Account the best thing since sliced bread, especially for those who are either already maxing out the RRSP or who are starting out and wouldn’t fully benefit from the RRSP deductions.

If you think this is too good to be true, feel free to give the Canada Revenue Agency a call yourself through the Tax Information Phone Service hotline 1-800-267-6999.

About the Author: Clare is a 20-something who lives in beautiful (but expensive) British Columbia and has been working on her frugal living skills and fighting lifestyle inflation. She works to expand her DIY investment knowledge and hopes to enjoy financial independence one day. She enjoys reading personal finance books, freelance writing, but not so much arithmetic.





19 Comments, Comment or Ping

  1. 1. abraxas

    There is a big gotcha with TFSA accounts. If you hold foreign securities in a TFSA there will be a 25% withholding tax applied to interest and dividends earned by those securities. A lot of Canadians have US securities in their TFSAs and that’s suboptimal. From my viewpoint TFSA is thus still inferior to RRSP. But it’s better than nothing, I guess.

  2. 2. FT

    Who says it has to be one or the other? Use both! I use the RRSPs for foriegn holdings, then use TFSA, then non-registered. Here is more info on portfolio allocation:

    http://www.milliondollarjourney.com/portfolio-allocation-rrsps-tfsas-and-taxable-accounts.htm

  3. 3. Jackie

    I like RRSP better because of the tax refund.

  4. @Jackie, the RRSP is a great tool, but only if you reinvest the tax refund. Otherwise, the TFSA will outperform.

  5. 5. Steve R

    TFSA is the best way to make money IMHO. Why give your money to a bank for a measly 2% when a good blue chip stock will give more.

  6. 6. nobleea

    Steve R, You can hold good blue chip stocks in TFSA, RRSP and non-registered funds. CAD blue chip stocks should be in the TFSA, US or foreign blue chip stocks should be held in the RRSP.

  7. 7. Graham

    Regarding contributions in kind. CRA site says you can contribute in kind from a RRSP. They don’t mention RRIFs, but presumably from there too. But will on-line brokerages do this type of contribution? Mine does not mention it.

  8. I have a DRIP in my TFSA but I have debt and I struggle with how much to put toward debt versus savings.

    I am in my late 40s and I have very little in retirement/TFSA savings. My debt equals one year of my take home pay. I am trying to put money toward both but I do not seem to be getting ahead on either one. I am looking for good advice on this and can’t find any definitive answers.

    I have had the TFSA for several years so even though I am not contributing much I have established the account so that I can contribute in the future.

  9. My second-favourite thing about TFSA investing is not having to do income tax paperwork for trading activity.

  10. 10. RyanEllis

    @FrugalTrader – RRSP IMHO is the better option to maximize first for younger individuals, especially considering that you can put that tax refund to work right away on debt repayment that typically is non deductible for most people (and typically higher than an annual return would be on a TFSA anyway). Another benefit of the RRSP is that I am regularly hitting high brackets, and do not want to pay out at tax rates above 40%. TFSA will not let me drop my effective tax rate as an RRSP will, and when I plan on using the funds, I am not going to withdraw it all at once so I again get to utilize lower brackets. Not getting the argument for a TFSA, just not as beneficial for me. When I have extra cash, I will top up both, as it is valuable, but the decision to allocate I think should always go to RRSP for younger people.

  11. @RyanEllis, some good commentary, thanks. For young people, my opinion is that they will not hit the highest tax brackets until they get established in their career. People just starting off, it may be a good idea to start an RRSP, but to defer to tax deducation future higher income years. But good idea about using the tax refund to pay down debt – as long as the refund is used wisely it should work out ok.

  12. 12. RyanEllis

    So I can’t just go “Wooo Vegas!” and spend it all? Good site, just taking a look around for the first time, some good articles.

  13. 13. fiscallyfit

    @ Graham. Not sure what you mean here but by in kind you mean you can simply move over units or shares without selling them then sometimes yes. Just to clarify though you still have taxes owed on the amount you are bringing over.

    Also, I don’t like how it is stated that as you withdraw dollars from the tfsa you get more room. You always get the original amount of room back. Additional room is only given if you account grows over the given amount and you make a withdrawal. You are then able to put whatever you took out back in. That amount would be adjusted if you account decreases in value

    http://www.milliondollarjourney.com/tfsa-contribution-room.htm

  14. 14. Graham

    Fiscallyfit – Yes a withdrawal “in kind” from a registered account is a transfer of units or shares rather than cash.

    There is no problem doing this from a RRSP/RRIF to an unregistered account. And it does seem that CRA would allow a TFSA contribution to be made this way.

    My question was whether the brokerages will do it.

    You are absolutely right that taxes would apply even although funds are going from one kind of registered fund to another.

    If withdrawal was not part of compulsory RRIF withdrawal, then withholding tax would presumably also apply. This becomes complicated and is why I wondered if brokerages would actually do it.

  15. 15. Roger

    Quote:”How to Increase your Tax Free Savings Account Contribution Room”

    THIS IS COMPLETE B.S.!!!!!!

    Do NOT follow ANY of this. The amount you can put in per year is FIXED and you can NOT increase it.

  16. 16. Andrew

    Two questions:

    1. If an investment held within a TFSA grows (e.g. stock) from, say, $5000 to $7500, and the stock is liquidated and the proceeds withdrawn from the TFSA, the full amount ($7500) becomes eligible for contribution back into the TFSA, right? (well, the following year, obviously)

    2. Comment #1 noted that INCOME derived from foreign investments held within a TFSA suffer a withholding tax of 25%. Is this also true of capital gains attributed to foreign investments? (e.g. if holding US blue chips in trading account, selling high, does this trigger 25% tax of gains?)

    Thanks!

  17. 17. Ed Rempel

    Hi Andrew,

    1. Yes. The full amount is eligible to contribute the following year.
    2. No. There is no US withholding tax on capital gains. This is another reason why investing your TFSA for growth is often the best strategy. (It is also appropriate for long term retirement savings.)

    Ed

  18. 18. Von_Zipper

    Hi Guys,

    I love the TFSA. I use it in candian stocks and have done moderatley well. My TFSA is worth about $34K now with the original $20K invested. Theoretically I could liquidate this 14K growth, then re-invest it in my RRSP get the tax benefit from the RRSP re-invest that back to top up my TFSA the following year.

    The TFSA is a great tool for growth. If you don’t mind taking risks with extra cash you can earn quite abit in a TFSA tax free and never lose that room. One investment manager I talked to had a client who’s TFSA was worth $250K. He/she will now have 250K worth of tax free investment room for the rest of their lives and never pay a single cent on the eanrings. It can be pretty powerful if used correctly.

  19. 19. MMA Fight! Magazine (@JustinBarracosa)

    So this year, they’ve increased the limit from 5000, to 5500. Does anyone know, have thoughts, or heard it suggested what the future will hold as far as increased annual limits? Is it possible in 10 years the limit could be 10,000 per year?

    Any idea’s as to what determines whether they bump it up again?

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