It’s one of the most beneficial and flexible financial products available, and without cost as long as you stay within your contribution limits (over-payments will incur a 1% per month charge on the excess).
What is the TFSA limit?
The TFSA contribution limit is the maximum amount you are able to contribute to your TFSAs without penalty. (If you contribute more, you will be taxed equal to 1% monthly of the highest excess TFSA amount in the month, until you take it out of the account.) However, note that your investments can grow within the account without penalty. The TFSA contribution limit for 2022 is $6,000 (and will increase to $6,500 in 2023), and if you have never before deposited money into a TFSA, your lifetime contribution limit is $81,500 in 2022 and $88,000 in 2023. If you have previously contributed, you can calculate your remaining contribution room by subtracting from this limit. Any income earned on the account is not counted toward the limit.
When did the TFSA program start in Canada?
The TFSA was introduced by Canadian Minister of Finance Jim Flaherty in 2008, as part of the 2009 federal budget. The program went into effect on January 1, 2009, when individuals 18 years of age or older, with a valid social insurance number, could begin making contributions. The program’s original intent was to help Canadians save for a new car, renovate a house, start a small business or take a family vacation. But since the launch, it has grown into a way to save for a wide variety of reasons, including longer-term financial goals, like retirement. As of 2021, an estimated 15 million Canadians had a TFSA.
Should I use a TFSA or an RRSP?
The main difference between a TFSA and an RRSP is how they are taxed. This means that when you withdraw money from a TFSA, you are not taxed. With RRSPs, the money is taxed on withdrawal.
With this in mind, you might be wondering why anyone would choose an RRSP. The answer lies, again, in the tax structure. When you put money into a TFSA, you do not receive a tax credit. But you do with an RRSP, and when you use it correctly, this credit can be a powerful tool. If, for example, you earn enough money to just break into a higher tax bracket, you could contribute to an RRSP and get an exemption that would bring you back into a lower bracket. Very likely, you’ll be in a lower tax bracket when you need to withdraw those RRSP funds in retirement, resulting in a lower lifetime tax bill.
As with all things investing, it’s usually a good idea to diversify. Both TFSAs and RRSPs have their uses as investment products.
Can you have more than one TFSA?
Yes, you can have more than one TFSA. But it’s important to note that in the government’s eyes, it’s like one account, in that your TFSA contribution room doesn’t change. The TFSA limit is the limit. That said, it can be a good idea to diversify your TFSA, like you would with your other investments. You can use one TFSA like a savings account and keep the money accessible and liquid as “cash.” And you can use another TFSA for investments, like GICs, stocks, ETFs or other types of investments. One caveat, though: Avoid withdrawing money from one TFSA to deposit to another. Instead, let the institution transfer the funds for you, so you don’t accidentally make a deposit that could count toward reducing your contribution room.
How do you open a second or third TFSA? It’s the same process as opening your first TFSA. At a minimum, you’ll need to supply your social insurance number and date of birth, but you may also be asked for supporting documents, such as a birth certificate and tax return. Many TFSA products can be opened online. You simply identify the TFSA product you want—like a savings account, GIC or fund—and apply at the financial institution that offers it.
Keph Senett
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