Question. Hi, I’ve heard that the TFSA limit has been increased. Does this mean I can put in $6,000 this year? And is the deadline the same as the RRSP deadline? Do you have any advice or suggestions to help me better understand how this works?

Answer. You are correct – the Tax Free Savings Account (TFSA) limit for 2019 has been increased to $6,000. However, you may be able to contribute significantly more than that, depending on how much you’ve contributed, and withdrawn, in previous years. Let’s dig into your question in a bit more detail.

TFSA Limit – How much can you contribute?

The maximum amount you’re allowed to contribute to your TFSA is known as your TFSA contribution room. Since the inception of the TFSA in 2009, your contribution room accumulates every year, provided that you are 18 years of age or older, and a resident of Canada, during that year. However, the annual limit isn’t fixed, and has changed several times over the years.

 

Your contribution room available in any given year is determined by:

• TFSA limit for that year; PLUS
• Any unused TFSA contribution room from the previous year; PLUS
• Any withdrawals made from your TFSA in the previous year.

Let’s illustrate these rules with a couple of examples.

TFSA Contribution – Example 1

Megan turned 18 in April 2013. She opened a TFSA in December 2018. How much can Megan contribute in 2018?

Megan’s TFSA contribution room is calculated by adding together the annual contribution limit for the years 2013 – 2018 inclusive. Note that Megan does not need to have a TFSA open in order to accumulate contribution room in those years. Additionally, note that Megan did not accumulate any TFSA contribution room for the years 2009 – 2012, as she had not yet reached age 18 during those years. Megan’s TFSA contribution limit for 2018 is therefore calculated as follows:

2013: $5,500
2014: $5,500
2015: $10,000
2016: $5,500
2017: $5,500
2018: $5,500
———————
Total: $37,500

Megan can contribute a total of $37,500 to her TFSA in 2018. If she makes no contributions, her contribution room will be increased to $43,500 in 2019. Similarly, any contributions she makes in 2018 would simply reduce her 2019 total contribution room accordingly.

TFSA Contribution – Example 2

Ahmed turned 18 in 2017 and opened a TFSA. Ahmed did not contribute anything in 2017, but he contributed $5,000 in April 2018. In December 2018, Ahmed’s investment had grown to $6,000 and he withdrew $2,500 to pay for a Christmas holiday. How much can Ahmed contribute in 2019?

Ahmed is entitled to the annual dollar contribution limit for 2017, 2018, and 2019. However he has already contributed $5,000 in 2018. Further, although he withdrew $2,500 in 2018, he can re-contribute this amount in 2019. The fact that his investment grew from $5,000 to $6,000 is not relevant for our calculation in this scenario. Also, he did not earn any contribution room in years 2009 – 2016 as he had not yet reached age 18 until 2017. Ahmed’s TFSA contribution room in 2019 is therefore calculated as follows:

2017: $5,500
2018: $500 ($5,500 annual limit – $5,000 contribution)
2019: $8,500 ($6,000 annual limit + $2,500 withdrawal from 2018)
———————
Total: $14,500

Ahmed can contribute a total of $14,500 to his TFSA in 2019.

TFSA – Excess Contributions

As indicated above, the amount you can contribute to your TFSA each year is limited by your contribution room. So, what happens if you contribute more than your contribution room? In short, you have to pay a penalty, and a fairly hefty one at that.

If you contribute more than your TFSA contribution room in any given year, you will be subject to penalty of 1% per month on “the highest excess TFSA amount in the month” for each month you are in an excess contribution position.

TFSA – Contribution Deadline

TFSA contributions are attributable to the year in which the contribution is made. This is somewhat different than RRSP contributions, where contributions made in the first 60 days of the year can be attributed to that year, or the previous year. No such rule exists for TFSAs. However, this is less relevant for TFSAs, given the lack of tax deductibility. That is, contributing to an RRSP results in a deduction from income, whereas contributing to a TFSA does not.

Bottom Line

Tax Free Savings Accounts are a great way to help facilitate savings for both short-term goals, such as saving for a car or home renovation, and long-term goals, such as retirement. Setting up your TFSA is a breeze with ModernAdvisor! If you’d like some help, just ask us.