This may be old news for those who follow Federal politics, but the Harper government has come through on their promise to raise the Tax Free Savings Account (TFSA) contribution limit.
I consider the TFSA to be an extremely powerful tool for investors, perhaps even more so than an RRSP. All investment gains within the account are not subject to tax and withdrawals from the TFSA do not affect the eligibility for seniors benefits. If you have a large RRSP when you retire, withdrawals are taxable and count as income against seniors benefits. This basically results in an additional tax on seniors. For more information, check out this article on seniors clawbacks.
The TFSA started in 2009 with a $5,000 contribution limit, then raised to $5,500 in 2013, and now raised to $10,000 in 2015. If you are just starting your TFSA in 2015, a Canadian resident since 2009, and over 18 since 2009, you can contribute up to $41,000. If you are just turning age 18 in 2015 (or 19 depending on the province), then you can contribute the 2015 amount, which is $10,000.
Here are the contribution limits by year:
- 2009-2012: $5,000;
- 2013-2014: $5,500; and,
- 2015: $10,000 (no longer indexed to inflation).
If you are a seasoned investor and already contributed $5,500 in 2015, you may be wondering if you can contribute the additional $4,500 this year. CRA has confirmed that they will honor the new budget and allow the increased contribution amount in 2015. In light of this, I have already moved $4,500 into both mine and my wife’s account.
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
- Guaranteed Income Certificates
- Equities (stocks, exchange traded funds, etc.)
From a tax perspective, I like to look at all my accounts as one big portfolio. For maximum tax efficiency, here are some ideas on which accounts to place your investments for maximum tax efficiency.
If you are an ETF investor, here are some ideas on simple ETF portfolios.
Where Can you Open a TFSA?
Many financial institutions offer TFSAs, but if you are a self-directed investor, you will want to open an account with a discount brokerage. I have put together a comparison of popular discount brokers in Canada. I like Questrade for beginners due to their low fees, ability to purchase ETFs without a trading commission, and ability to cheaply exchange USD within their accounts.
If you have the cash available, go ahead and take advantage of the new $10,000 TFSA contribution limit for 2015. Remember that it does not have to come from cash on hand, if you have non-registered investments, you can sell (or transfer in-kind) and deposit the cash proceeds (but note the tax consequences on capital gains). Remember though, if you transfer in-kind at a loss, you cannot take advantage of the capital loss tax deduction. If that is the case, then it’s best to sell at a loss, and contribute the cash.
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