The TFSA limit has grown to $6K — should Canadians contribute?
Canadians hoping to save money after the holidays now have an option to stash away more cash this year — and tax-free.
The Canadian government has raised the annual contribution limit for Tax-Free Savings Accounts (TFSAs) to $6,000 in 2019, up from $5,500 last year.
And experts are calling this a New Year’s gift.
“For those who have the wealth to do it, the TFSA is a pure gift, there is no downside to it,” said Ted Rechtshaffen, head of Toronto-based TriDelta Financial. “It’s money that is sheltered forever. Anytime there is more room in a TFSA, it is purely positive.”
What is a TFSA?
A TFSA is a way for Canadians who are 18 years of age and older to put away money into a savings account, which will be tax-free throughout their lifetime. Any amount put in and taken out, even if it’s an investment, bond or mutual fund, is tax-free.
“The power of TFSAs is its ability to help Canadians grow their wealth tax-free over a long period of time,” said Rona Birenbaum, a certified financial planner and CEO of Viviplan and Caring for Clients.
TFSAs began in 2009, under the Harper government, and initially had a dollar limit of $5,000. It has risen to $5,500 for the past few years, and briefly to $10,000 in 2015. And now it’s $6,000 as of 2019.
When TFASs first started, the government said it would increase the contribution level with inflation, but it would only increase in $500 increments.
Birenbaum, meanwhile, said the best news about the new TFSA increase is that it reconfirms the government’s commitment to help Canadians invest.
TFSAs are also cumulative as unused room carries forward from previous years.
So if you were 18 years old in 2009 — the year it started — and haven’t yet put money away into a TFSA, you can put in a total of $63,500 tax-free.
Should you contribute to a TFSA?
Rechtshaffen said if you have the financial means to put away money into a TFSA, then it’s a “no-brainer,” as you can as you can take out the money from the account anytime you want tax-free.
“Anyone who has meaningful money that is taxable should use a TFSA, because you are basically saying you do not want to pay tax,” he said.
“The only difficulty is if you’re at the limit, you can only put the money back into the TFSA in the next calendar year, so you can’t use it like a regular bank account, where you just take money in and out,” he added.
Birenbaum agreed and said if you have the option to save money in a TFSA versus a taxable savings account, choose the former.
But she warns Canadians to always keep track of what is in there. “If you over-contribute to a TFSA, the CRA can impose a tax,” she said.
WATCH: A look at how taxes affect your savings outside an RRSP or TFSA
What about an RRSP?
Registered Retirement Savings Plans (RRSPs) are similar to TFSAs, as they help you boost your savings by sheltering them from tax.
RRSP contributions are capped at 18 per cent of the earned income you reported on your tax return the previous year, up to a maximum amount ($26,010 for 2017).
There is no minimum age for opening an RRSP, but in the year you turn 71, you must stop making contributions and convert the account into either an annuity or a so-called Registered Retirement Income Fund (RRIF), which requires that you make minimum withdrawals every year.
RRSP or TFSA?
RRSPs are specifically meant to help you save for retirement, while TFSAs work well for a variety of savings goals, like buying a car.
Contributions to TFSA accounts are not tax-deductible compared with RRSP contributions, which generate a deduction when you file your income tax return.
WATCH: Should you hustle to make an RRSP contribution?
On the flip side, you’re taxed when you take money out of your RRSP, but not with your TFSA.
“Baby boomers have started to withdraw money from RRSPs … and can be frustrated about the tax they have to pay,” Birenbaum said. “And TFSAs do not have this … so there is compound interest and no tax, making TFSAs a superpower.”
Birenbaum and Rechtshaffen recommend using a process of elimination when thinking about whether to contribute to a TFSA or RRSP.
For example, how much money you make is a huge factor.
If your income is low — for example, under $40,000 a year — Rechtshaffen said you should use a TFSA first. And five years later, if you are making more money, you can take funds out of your TFSA and put contribute to an RRSP for a bigger tax refund.
If you have a higher income, such as $150,000 a year, Rechtshaffen said you should “definitely” be using RRSP room first and then put away extra in a TFSA.
Saving for retirement in an RRSP is like being on a teeter-totter. It works best when you start high and end low, Rechtshaffen explained.
WATCH: The hazards of dipping into your RRSPs
“You want to ideally receive a tax refund at a rate that is higher than the rate of tax you will pay when you take the money out,” he said.
Using a TFSA, on the other hand, is like sitting on a bench from a tax point of view, he said. There is no tax benefit when you put your money in but you do not get taxed when you take it out.
— With files from Global News’ Erica Alini
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