Introduced in 2009, the Tax-Free Savings Account has become one of the most important tools for Canadians in their personal finance arsenal. Clients have been approaching me about upcoming TFSA contributions for themselves and their children, and as 2023 comes around, another group of young investors becomes eligible for the plan. Therefore, it doesn’t hurt to review the basics.
What is a TFSA and what are the benefits?
A TFSA is an account, where, subject to contribution limits, you can buy and hold investments without any tax to pay on investment income, capital gains, and withdrawals. It’s beneficial for anything from short-term guaranteed investments set aside as an emergency fund to longer-term investments intended for retirement.
When can I start a TFSA and how much can I contribute?
The TFSA is eligible for all residents of Canada, and the earliest you can open a TFSA is when one turns 18 years old. The contribution room accumulates annually, starting in the calendar year you are eligible to open a TFSA. The annual contribution limits since the inception of the TFSA is listed below and includes the upcoming limit for 2023 of $6,500, which was recently announced by the CRA. The contribution room has been increased for next year to take into account inflation as limits are indexed to the CPI. For those that have been eligible for the TFSA since 2009, your total contribution room as of 2023 will be $88,000. Clients with children over the age of 18 (or turning 18 in 2023) can find out their eligible contribution room by adding up the annual limits for the years since their child turned 18.
While you must be a resident of Canada to contribute to a TFSA, those that move abroad are still able to keep the account. However, any contributions made while a non-resident of Canada will be subject to a tax, so if you are temporarily living abroad for work – it would be best to leave the TFSA untouched during that time.
What happens if I overcontribute and can I withdraw my money?
A common issue with the TFSA is miscalculating your limit or losing track of how much money you have already contributed. Remember that your contribution amount is the sum of your contributions in all your TFSA accounts. Therefore, if you hold multiple accounts with different financial institutions, you must ensure that the total across those accounts has not gone over the limit. If you end up going over your contribution limit in a given year, you may be taxed 1% of the excess amount for each month the excess remains in your TFSA. The best solution for this is to take out the excess as soon as possible to avoid accumulating large penalties.
When making withdrawals that are not related to an excess contribution, the withdrawn amount will be added back into your contribution room. The caveat is that the contribution room will not be added back until January 1st of the following year.
Where and how can I open a TFSA account?
You can open a TFSA at many financial institutions, including banks; contact your advisor to open one.
It may be a great time to take advantage of the tax-free investing benefits of a TFSA, especially as the stock market has pulled back from recent volatility. You will be surprised at the power of tax-free compounding over the years.