Probably boring, definitely important
Written by: Erin Fiell
In mid-November, it was announced that an increase from $5,500 to $6,000 in the annual limit of Tax Free Savings Accounts (TFSAs) was scheduled for January of 2019. This increase marks the second highest TFSA contribution limit ever implemented. Before we jump into what this means for you and your money, let’s take a deeper dive into the world of TFSAs.
What is a TFSA and how do they work?
In 2009, the government of Canada rolled out the brand-new TFSA program, a system for Canadians over the age of 18 to manage their hard-earned cash free from taxation. However, these accounts aren’t JUST for money – with a TFSA you can also buy equities, including stocks, mutual funds, ETFs and more. TFSAs can be issued by banks, insurance companies, credit unions, and trust companies. There are three types of TFSAs that can be issued by these institutions: deposits, annuity contracts, and arrangements in trust.
Let’s compare Registered Retirement Savings Plans (RRSPs) with TFSAs. There are three main differences between these types of savings accounts: 1) The annual contribution limit of TFSAs is a flat rate applied to all account holders, whereas RRSP limits are determined based on the employment income of the account holder from the previous year; 2) Contributions to an RRSP are tax deductible, and withdrawals are added to your taxable income; 3) TFSA contributions are not tax deductible, however, withdrawals from your TFSA are not added to your taxable income.
What are the perks of having a TFSA?
TFSAs are a simple, flexible and one of the most profitable ways to maximize your money.
Each year, you can contribute up to the maximum contribution limit to your TFSA. In 2018, this figure was $5,500. As a TFSA holder, if you have unused contribution room by the end of the year, the balance will be carried into the following year – a big plus for those who desire a more flexible option for their savings and equities. This tax-free compounding effect presents a BIG perk for TFSA holders. Check out the below graph courtesy of RBC, which demonstrates how $5,000 deposited annually under a 6% interest rate grows even more in a TFSA as opposed to outside of a TFSA. Ca-CHING.
With a TFSA, you can also withdraw and deposit your earnings, anytime and for any reason at all apart from certain product restrictions such as GIC maturity dates. You hold ALL the power to do what you want or need with your TFSA.
Why has the contribution limit increased?
The annual contribution rate of TFSAs has remained relatively steady at $5,500 from 2013 until 2018 (apart from a significant hike to $10,000 in 2015). So why has it gone up in 2019?
The rise in the contribution rate is really nothing more than a timely and scheduled adjustment. When the TFSA was first introduced in 2009 at $5,000, this number was always intended to increase as it has been indexed to inflation and rounded to the nearest $500 on a yearly basis. The CRA announced this week that this year’s inflation factor is 2.2% – a high enough number to tip the scales and bump up the TFSA contribution limit to $6,000.
Is it a smart idea to open a TFSA in today’s economic climate?
Absolutely! TFSAs present a fantastic jumping off point for young adults entering the world of work to kick-start their investment portfolios and maximize their savings, regardless of the Bank of Canada’s steady interest rate, personal debt, or income level.
For those who haven’t yet opened a TFSA and were 18 or older when the program was rolled out ten years ago – your maximum TFSA cumulative limit is now sitting at a cushy $63,500. Now we’re not exactly in the business of giving financial advice here at Btchcoin, but it seems like a no-brainer to us. Get yourself a TFSA! Bonus points if you get your bank to automatically withdraw a set amount of cash from every paycheque into a TFSA.
It’s always smart to tuck some money away, whether its $60 or $6,000 and it’s never too early (or too late) to start taking money saving seriously.