Calculate how much you can contribute to your TFSA:
The TFSA contribution limit for 2023 is $6,500. If you were born before 1991, you can deposit a total of $88,000. Those born after 1991 will have a smaller total contribution limit. Unused TFSA contribution room rolls over from one year into the following year.
A Tax-Free Savings Account (TFSA) is an investment account created in 2009 that lets individuals 18 years or older with valid social insurance numbers invest their money tax-free. You can invest in stocks, bonds, exchange-traded funds (ETFs), mutual funds, and more through this account.
|Year You Turned 18||Annual Contribution Limit||Cumulative Contribution Limit|
|2009 or Earlier||$5,000||$88,000|
These are the unadjusted contribution limits that are applied each year. Next year's annual contribution limit and your total contribution limit can change with investment returns. If you earn any investment income or capital gains using the money in your TFSA, these increase your total contribution limit and do not affect your TFSA contribution room. Likewise, any losses are deducted from your total contribution limit and do not affect your TFSA contribution room.
For example, assume your unadjusted total contribution limit is $6,000 and you contribute $2,000, which means your total contribution room is $4,000 ($6,000 - $2,000). Let's say you earn $500 through wise investments. Your new total contribution limit will be $6,500. But since you now have $2,500 in your TFSA account, your total contribution room will still be $4,000 ($6,500 - $2,500). If you decide to withdraw the $500 this year, your contribution room will increase by the Annual Contribution Limit + $500 next year.
Each year, you are allowed to contribute up to a fixed amount to your TFSA. If you don't contribute the maximum amount for that year, don't worry because your TFSA contribution room is cumulative. That means that you can deposit and withdraw as much as you like, and your total contribution room will stay the same. You can check the CRA's website or manually calculate your TFSA contribution room.
Calculating your TFSA contribution room by hand is a simple and easy process. The most challenging part is gathering your past contributions and past withdrawals.
Step 1: Find your total unadjusted contribution room by using the contribution limits table to add up the annual limits for each year you were at least 18 years old.
Step 2: Subtract any contributions you have ever made to your account. Even if you later withdrew the money, adding them all here will simplify the calculation.
Step 3: Add any TFSA withdrawals you have made before 2022. While adding what was subtracted in Step 2, adding your total contributions and subtracting your total withdrawals afterwards ensures that you don't accidentally miss anything.
Step 4: ONLY for calculating your 2023 TFSA contribution room, add any withdrawals in 2022. You cannot re-contribute this amount in 2022.
As long as you maintain a positive balance, you can withdraw any amount from your TFSA without penalties or taxes. However, the withdrawn amount is still considered "contributed" and can only be re-contributed next year. Any additional contributions can only be made using your total contribution room before the withdrawal. You shouldn’t consider withdrawals made this year in this year's total contribution limit, or you may end up over-contributing. If you earn any investment income or capital gains, you can withdraw this amount without affecting your entire contribution room.
For example, assume your total contribution limit is $6,000, and your TFSA account has $2,000 in it. Your total contribution room for this year would be $4,000 ($6,000 - $2,000). Let's say you withdraw $1,000. Your total contribution room for this year stays at $4,000. If you decide to re-contribute $1,000 this year, your remaining contribution room will be $3,000 ($6,000 - $2,000 - $1,000).
You will need to pay tax with both types of accounts. Just the timing will be different. With the TFSA, you contribute your after-tax earnings to the account. However, you will not need to pay tax when you withdraw your profits. With a TFSA, you pay income tax in the present, so you don't have to pay tax in the future.
An RRSP is the opposite; you don't pay tax in the present, so you will need to pay it in the future. Contributions to your RRSP are deductible from your income tax, so you can think of it as your pre-tax income. However, when you need to withdraw from your RRSP, you must pay tax. This is unless you are a first-time homebuyer using the RRSP Home buyers' Plan (HBP).
Generally, it's advised for younger people to focus contributions on their TFSA. This is because their income is expected to increase over time. By paying taxes when their income is lower, they will not need to pay taxes on withdrawals when their income is higher.
RRSP focus is generally advised for those in the peak earnings of their career. The deductions offset their income taxes, and they can withdraw the profits when they are in a lower income tax bracket. However, with the RRSP Homebuyers' Plan, contributions are also great for younger people looking to buy a home. You don't pay tax on contributions or withdrawals to finance your down payment with this program.
For the following example, let's assume you are saving up for a home down payment but don't know if you should prioritize investing through your TFSA or RRSP. To simplify the example, let's assume the following facts:
|TFSA||RRSP (with HBP)|
|After One Year|
|After Five Years|
|Simple Return on Investment||29.06%||64.77%|
It makes sense to prioritize your RRSP for the first $35,000 you will need to withdraw when buying a home. This is because you save income taxes each year. This strategy only makes sense because of the Home Buyer's Plan, which prevents you from paying taxes on your withdrawals.
However, after the $35,000 threshold, you will need to pay taxes on withdrawals from your RRSP. Using a maximum mortgage affordability calculator, this down payment could afford a house less than $400,000. With the high prices in the Canadian housing market, you will likely need more funds for your down payment.
If you expect your taxable income to rise by the time you buy a house, then the most tax-efficient strategy is to fund the rest of your down payment from your TFSA investments.
Overall, it makes sense for first-time homebuyers to prioritize RRSP contributions but fund the remainder of their down payment from TFSA investments. This could mean a 60/40 split of contributions to your RRSP and TFSA. Another option is to use down payment assistance programs (DPAPs).
If you end up contributing more than your total contribution room, the Canada Revenue Agency (CRA) will charge you a monthly fee of 1% on the highest excess TFSA amount for that month. A 1% fee may sound small, but this is equivalent to 12% each year, which is massive! For example, a $10,000 over-contribution would cost you $1,200 per year.
Since the TFSA uses the highest excess TFSA amount, you will have to pay the full 1% fee even if you are over-contributed for just one day.
Avoiding the Over-Contribution Penalty: Keep track of any contributions and withdrawals you make and keep a record to ensure you do not over-contribute. If, at any point, you are unsure about how much space you have, call the CRA directly to receive your exact contribution room. The CRA's website does not include contributions made this year to calculate your total contribution room.
What to do with an Over-Contribution Penalty: If you over-contribute to your TFSA, the CRA will eventually send you an "Excess Amount Letter," but this can happen several months after you over-contribute, so it is essential to check this yourself regularly. If you receive this letter, follow these steps:
Step 1: Immediately withdraw the excess amount to avoid additional over-contribution fees. This helps show that it was an accident and the fee will not be applied next month.
Step 2: Pay the total penalty and submit a TFSA Over Contribution form. You will only have a limited amount of time to pay the fine before incurring extra fees.
Step 3: Once you have handled these urgent issues, send the CRA a letter describing why it was an accident and ask them to refund this fee. The CRA will refund this amount if you can reasonably prove that you didn't know and that the CRA did not inform you.
Now is the time if you have not yet started contributing to a TFSA. A TFSA and RRSP are the best methods to save for a mortgage down payment. The TFSA offers many benefits, including tax-free growth on investments and tax-free withdrawals for any purpose. Be sure to avoid over-contributing by tracking your contributions and withdrawals closely. If you end up over-contributing, make sure to immediately withdraw the excess to minimize the penalties.
A misconception with the TFSA is that you can only use it as a savings account. Depositing your money into a "high interest" TFSA at a big bank will likely only pay you less than a 1% return every year.
In reality, you can use your TFSA to invest in almost any asset that you can hold in your registered retirement savings plan (RRSP). This includes stocks, ETFs, mutual funds, bonds, and more. Unfortunately, you can't invest in pure cryptocurrency through your TFSA; however, there is a workaround. In Canada, there are multiple cryptocurrency ETFs that track the return of bitcoin. You can hold these ETFs in your TFSA.
Did you know that you can also invest in mortgages with your TFSA? According to the CRA’s Income Tax Folio, mortgages are generally prohibited from TFSAs due to the risk of self-dealing. However, mortgages that are insured by the CMHC or by a private insurer are allowed to be held in a TFSA. There are even services that can help you to use your TFSA funds to fund private mortgages, such as with Canadian Western Bank’s Trust Services. You can also invest in a Mortgage Investment Corporation (MIC) with your TFSA. As Canadian mortgage rates rise, the yield of mortgages will rise too. This increases your mortgage investment returns.
Overall, it's essential to understand that your TFSA should be used for investments and not another savings account. Depositing the money into your account is not enough; you also need to invest it to take advantage of the tax-free returns.
Yes, you can have multiple TFSA accounts. The only limit is your total contribution room which is a fixed amount per person. This means opening multiple TFSA accounts will not increase your contribution limit. Instead, having multiple accounts can expose you to the following risks:
TFSA contributions are not tax-deductible from income tax. You contribute to the account with after-tax money. As a result, there is no need to pay capital gains tax on any withdrawals.
This is the opposite of an RRSP which allows you to deduct contributions from your income tax. However, you need to pay taxes when you withdraw the money with an RRSP.
Yes, although it's generally not recommended to invest money that you may need in the next 5-10 years. However, you can withdraw tax-free without penalties if you need the money. The amount you withdraw will be added to your contribution room in the next calendar year.
Always double-check with your investments to be sure there will be no fees. Certain funds may have a minimum investment period. Some mutual funds will charge a penalty if you withdraw earlier. A home equity line of credit (HELOC) is another good option for emergency cash for existing homeowners.
Yes, the TFSA can be used to lower your family’s total overall tax burden. The tax strategy works when a higher-income spouse gives money to their lower-income partner. The higher-income spouse then has a lower taxable income while the lower-income spouse has money to contribute to their TFSA.
The higher-income spouse does not receive a tax deduction, as with a spousal RRSP. However, the family benefits from the tax-free growth of their investments.
Yes, you may name your spouse as your TFSA successor or beneficiary.