The 2020 New Year brings with it another opportunity to utilize your Tax-Free Savings Account (TFSA) and protect your investment income from taxation. If you’re 18 years old and a resident of Canada, you are eligible to start accumulating TFSA contribution room. You can choose to save or invest funds tax-free up to the maximum of your contribution room.
2019 TFSA Contribution Limit and over the Years (2009 – 2020)
The annual TFSA dollar limit had been pegged at $5,500 for the past 5 years, excluding 2015 when the conservative government briefly increased it to $10,000. For 2020, the annual TFSA limit remains at $6,000 (also $6,000 in 2019)!
If you have been eligible to contribute to the TFSA since it’s inception in 2009, it means that in 2019, you had a total contribution room of $63,500, and for 2020, your contribution room increases to $69,500.
Essentially, you can invest up to $69,500 upfront and not have to pay any taxes on the income earned on your investment.
The table below shows the annual TFSA contribution limits since 2009:
Related: TFSA Over-Contribution Penalties
How the Annual TFSA Limit is Calculated
The TFSA annual dollar limit is calculated by indexing it to inflation and rounding it off to the nearest $500. The government determines the indexation factor for each year from the percentage change in the average Consumer Price Index (CPI) over the previous year.
For example, to compute the limit for 2009, we multiply $5,000 by the indexation factor of 0.6% (1.006) in use that year: $5,000 x 1.006 = $5,030. This result was then rounded off to $5,000.
For the 2019 TFSA limit, the indexation factor is 2.2%. As such, when we calculate the indexed TFSA limit for 2019 (i.e. $5,721 x 2.2%), we have $5,847 which is rounded off to $6,000.
For the 2020 TFSA limit, the indexation factor is 1.90%. When you compute the indexed TFSA limit for 2020 (i.e. $5,847 x 1.9%), you get $5,958 which explains why the TFSA annual limit remains at $6,000.
*Inflation-adjustment was cancelled for 2015 and the annual limit was pegged at $10,000.
From the table above, it’s obvious that persistently low inflation prevented the TFSA limit from increasing to the next bracket of $6,000 for several years.
2020 TFSA Unused Contribution Room
If you’ve not been contributing the maximum limit every year, it will accumulate and you’ll have ‘unused’ TFSA contribution room. Unused contribution room can be carried forward indefinitely.
Also, if you choose to withdraw funds from your TFSA in any particular year, the amount withdrawn can be re-contributed in the following year.
To calculate your total contribution for 2020:
- TFSA limit for 2020 ($6,000), plus
- Unused contribution room for 2019, plus
- Withdrawals made in 2019.
Contribution Room Example
Let’s say Jane became eligible for TFSA’s in 2017, however, she was unable to make any contributions until the following year in January 2018, when she contributed $8,000. In September 2018, she withdrew $3,000 from her TFSA for an emergency. What is her total contribution room for 2019?
- contribution limit for 2017 = $5,500
- + contribution limit for 2018 = $5,500
- – contribution made in 2018 = $8,000
- + withdrawal made in 2018 = $3,000
- + contribution limit for 2019 = $6,000
- Total TFSA Room for 2019 = $12,000
For 2019, Jane has a total contribution room of $12,000.
If you’re confused about what your unused TFSA contribution room is, you can also find it on your Notice of Assessment or via My CRA Account.
TFSA Investment Options
A variety of investments can be held in a TFSA account including stocks, mutual funds, ETFs, GICs, bonds, cash, etc. Click here for sample index fund and ETF portfolios you can use in your TFSA.
If you prefer a hands-off approach to investing your TFSA funds and at a much lower fee than the average mutual fund, consider using Robo-Advisors. Robo-advisors use low-cost ETFs to build your portfolio and charge a small management fee.
My top robo-advisor pick in Canada is Wealthsimple. When you sign-up using this promo link, they will invest your first $10,000 FREE for one year!
There are penalties for running afoul of CRA rules relating to your account. Some non-compliances that result in penalties include:
- Over-contributing to your TFSA
- Investing in non-qualified or prohibited investments inside your TFSA
- Contributing to a TFSA while you’re deemed a non-resident of Canada
The most common offence is when people over-contribute to their TFSA either deliberately or because they’ve misunderstood the withdrawal and re-contribution rules.
Over-contribution results in “Excess” TFSA contribution which is levied a 1% penalty tax per calendar month, until it’s removed.
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