If you turned 18 on or before 2009, you have a ton of TFSA contribution room that you can use at any time. Our table below gives you a quick look at the annual TFSA contribution room that would have accumulated over the years for you.
Knowing how much you can put in your TFSA is essential to getting the most out of your investment dollar, and understanding the TFSA contribution rules can help make sure that you stay on the right side of the CRA. If you have been a good little saver and been maxing out your TFSA (and using a discount brokerage to invest your savings) then the maximum amount of your TFSA contribution in 2020 is $6,000.
Here are the TFSA contribution limits for 2009 to 2020:
- 2009: $5,000
- 2010: $5,000
- 2011: $5,000
- 2012: $5,000
- 2013: $5,500
- 2014: $5,500
- 2015: $10,000
- 2016: $5,500
- 2017: $5,500
- 2018: $5,500
- 2019: $6,000
- 2020: $6,000
If you have never contributed to your TFSA and turned 18 in 2009 or before, you are allowed to contribute a total of up to $69,500.
TFSA Rules for Investing in Your Tax Free Investing Account
I’ve always thought that the Tax Free Savings Account was a terrible name for what the TFSA actually is. Many Canadians hear the keyword of “savings” and they think that the TFSA is simply a really souped-up version of a high interest savings account. Certainly it can be used that way. If you want the ultra-safety of a TFSA-sheltered high interest savings account, we recommend checking out our EQ Bank review for a look at the best online savings option in Canada.
The far better option for most Canadians who are saving for the medium- to long-term however, is to use the TFSA as a Tax Free Investing Account!
See, tax sheltering is a beautiful thing. Watching your capital gains and dividends roll in while the tax man looks the other way is a great way to build wealth in Canada. The TFSA rules state the Canadians can basically invest in any common investment option in Canada. Personally we recommend using an all in one ETF or specializing in dividend growth stocks (which also work great outside of your TFSA). Robo advisors such as Wealthsimple are also an excellent option for your TFSA if you’re looking for a quick-and-easy hands off solution.
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The key thing to understand in regards to the TFSA rules around investment options is that stocks, bonds, ETFs, and mutual funds are all fair game. While you might want to use part of your TFSA contribution room to save for a housing downpayment or a new vehicle, TFSAs also make excellent accounts for the longer term as well.
Withdrawing from TFSA and Re-Contribution Rules
In addition to the annual contribution room that the government allows you to have in a TFSA, it is important to understand that you can re-contribute back any money that you withdraw from your TFSA.
(and this is a big BUT)
You can only re-contribute that money back during the following calendar year. This gets a bit confusing, but it’s worth understanding, because the penalties for over contributing to your TFSA by mistake are pretty harsh!
Let’s look at an example:
Jane is 30-years-old and decided to open a TFSA account in 2016. She would have had $46,500 in TFSA contribution room at that point, but Jane is like most Canadians and did not have forty-six thousand dollars just lying around. Instead she opened a TFSA account and contributed $5,000 to it. This left her with $41,500 in TFSA contribution room.
Over the next two years Jane got raises at work, and really prioritized saving in her life. She was able to contribute $15,000 to her TFSA in 2017, and $20,000 in 2018. In total, Jane would have now contributed $40,000. Since she also gained TFSA contribution room in each of those two years, Jane would now have 17,500 in leftover contribution room. As a bonus for Jane, it has been a fantastic few years in our hypothetical stock market, and the overall value of her TFSA investments has risen to $55,000. How her investments perform is almost irrelevant to Jane’s contribution room at this point though.
In 2019 Jane contributes $23,500 to her TFSA, and thus maxes out her TFSA contribution room up until the year 2019. It was another good year in the stock market as well, and the total value of the tax-sheltered assets in Jane’s TFSA account grows to $86,000.
In 2020 Jane withdraws $15,000 to purchase a used car. She sells $15,000-worth of investments, and then withdraws the money.
As 2020 rolls to a close, Jane gets back to her saving ways and also receives a bonus at work. It’s key for Jane to understand that the most she can put into her TFSA without incurring a penalty is $6,000. This is the 2020 TFSA contribution limit, and she has no other contribution room from past years.
When the clock strikes midnight on December 31st, 2020, a whole new world of TFSA contribution room opens up for Jane.
Not only does Jane get her 2021 TFSA contribution space (likely to be $6,000) but Jane would also be able to re-contribute the $15,000 that she withdrew in 2020 to purchase the car.
If instead of a car, Jane had sold all of her investments held within her TFSA in 2020, and cashed out the $86,000 to make a downpayment on a house – then in 2021 she would have been able to contribute her new 2021 TFSA contribution room ($6,000) PLUS the $86,000 that she withdrew the year before for a total of $92,000 in TFSA contribution room going forward.
You can see from the above example that investing in assets with a higher risk/reward profile than a high interest savings account, can have more benefit that what first meets the eye.
What if I lose money on TFSA?
If the value of your investments that are inside of your TFSA shrinks, you cannot claim a capital loss because a TFSA is a registered account. You also can’t “get your contribution room back” by cashing out and “starting over”.
Whatever money you take out, is the amount you’d be able to re-contribute the following year (plus your new TFSA contribution room for that calendar year).
Ultimately you want to avoid taking a large loss in your TFSA and then being forced to sell the investments and withdraw the money. The rule of thumb a lot of advisors use is that if you need the money in the next 5-7 years, your exposure to stocks should be fairly limited. If you have a 30-year time horizon on your investments, a bad couple of years in the stock market shouldn’t really affect anything, as you’ll simply leave the investments in your TFSA so that they can re-grow away from the cold hands of the tax man.
What is the TFSA Over Contribution Penalty?
The Canadian Revenue Agency has some pretty strict taxation on over contributions to your tax-free savings account. Anything in excess of the allowed tax-free contribution room is subject to a 1% penalty charged on a monthly basis on the highest excess tax-free savings amount.
Therefore, if over contributed from August to December (5 months) by $2,000 for the year, 1% of $2,000 would be charged, which equates to $100 in extra taxes.
It makes sense to be cautious, but your tax-free savings account contributions and withdrawals have been difficult to keep track of, this begs the question, how does one keep track of the TFSA contribution room?
How to Access Information about your TFSA Contribution Room in 2020
Although the Canada Revenue Agency is pretty good about letting you know how much-unused tax-free savings account contribution room you have, sometimes it is difficult to keep track, especially if Notice of Reassessments are done and the “explanation of changes and other important information” appears different in your reassessment.
There is one easy way of accessing important information you may need throughout the tax year, and that is to use the Canada Revenue Agency’s My Account tool.
To use My Account, all you need are:
- Your social insurance number
- Your Notice of Assessment (or Reassessment), specifically to access line 150 of the previous year’s tax return (which is your total income reported)
- Your birth date
My Account also gives you information on:
- Your RRSP contribution room for the current year
- The GST/HST credit you are eligible for
- Your eligibility for the Canada Child Benefit
Once you input these numbers, you will be able to access the tax-free savings account contribution room for the current year (not including the contributions already done in the current year).
If you would rather speak to someone in person (and wait on hold of course), calling the Canada Revenue Agency’s Tax Information Phone Service (TIPS) can also provide you with the same information. The phone number for TIPS is 1-800-267-6999.
Do TFSA Contributions or Withdrawals Affect CPP, OAS, or My Pension?
TFSA contributions are made with after-tax dollars. This means two important things for most people:
- You do not get a tax refund like you would if you contributed to an RRSP.
- When you withdraw money from your TFSA account, it is not counted as taxable income for that year like money from an RRSP withdrawal would be.
Consequently, TFSA contributions will never affect your CPP, OAS, or Pension.
It is a similar case when we look at TFSA withdrawal rules as well. This is where the TFSA really shines. Whereas withdrawing money from your RRSP can affect government benefits such as the Old Age Security, TFSA withdrawals are not counted as income in regards to eligibility for any pension program!
You can even take a quick gander at the video below to see how a creative TFSA strategy can allow you to withdraw thousands of dollars per year from a TFSA, and yet still max out the money you can receive from the government in retirement.
Is There TFSA Contribution Deadline or Withdrawal Deadline in 2020?
There are no TFSA contribution deadlines or a TFSA withdrawal deadline in the same way that the RRSP has deadlines. Your TFSA contribution limit represents a maximum contribution for the year, but it simply accumulates over time if you don’t use it. Because there is no tax refund to worry about (like there usually is with an RRSP) there is no need to worry about taxable income coming in or going out of a TFSA. Really the only TFSA contribution rules that you have to keep track of, is the total amount of money that you have contributed in a given year, your total amount of past TFSA contribution room that you haven’t used up yet, and how much TFSA cash you withdrew last year, so that you don’t trigger the TFSA over contribution penalty as discussed above.
If you still have TFSA contribution room in 2020 check out my review of the best discount brokers for TFSAs.
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