Tax Free Savings Account

Increased TFSA Contribution Room - Benefits to You

As of January 1, 2013, Canadians were able to contribute an additional $500 to a TFSA with the annual contribution limit reaching $5,500.

Key benefits:

Accumulate more savings tax free – and don’t forget, with the increased contribution limit individuals can accumulate more in a TFSA annually which has significant benefits over the life of a TFSA.

Unused contribution room is automatically carried forward – if you were 18 years of age or older in 2009, and you’ve never contributed to a TFSA, you can contribute up to $31,000 in 2014.

Why did the contribution amount increase?

Starting in 2009, when the program was launched, the initial $5,000 annual contribution limit was indexed to inflation using Consumer Price Index (CPI) data, rounded to the nearest $500. In 2013, when the 2% indexation increase was applied to the cumulatively indexed TFSA dollar limit and rounded the result was $5,500, the new contribution limit.

Why contribute to a TFSA?

A TFSA is a great way for you to save for your short-term goals, such as saving for a major purchase like a car, vacation or simply building a nest egg. TFSAs are also a great tool to save for your long-term goals, either as a complement to your existing retirement plan or when saving for a down payment on a home. Withdrawals from a TFSA are tax-free and the full amount of withdrawals can be put back into the TFSA in future years. Tip: Plan for re-contributions one year after your original withdrawal. Re-contribution within the same year as a withdrawal may result in an over-contribution amount, which would be subject to penalty tax.

Something more to consider...

If you have never contributed to a TFSA, but were eligible since their introduction, 2014 represents a unique turning point opportunity to save for a down payment for your first home. Depending on your tax bracket, saving in a TFSA may be a better option than using the RRSP Home Buyers’ Plan.

With the cumulative TFSA limit of $31,000 now slightly exceeding the Home Buyers’ Plan maximum withdrawal amount of $25,000, Canadians who find themselves in a lower tax bracket may find contributing to a TFSA a better option for saving for a down payment. They can now save and withdraw the same amount they could have had they participated in the Home Buyers’ Plan without the same repayment requirements (equal installments over 15 years). With the TFSA, re-contribution can be made anytime in the year following the withdrawal as it is added back into your overall contribution room amount.

 

 

 

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