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Top up your TFSA

The annual maximum contribution amount for Tax-Free Savings Accounts (TFSAs) was reduced from $10,000 in 2015 to $5,500 in 2016.  It’s important to note though that any previous years’ unused contribution room can be carried forward and withdrawals can be re-contributed – so you may have even more room in your TFSA than you thought.

Know your limits

  • Since 2009 when TFSAs were introduced, Canadian residents aged 18 and older started accumulating contribution room. In the first four years of the program, the maximum contribution amount was $5,000. In 2013 and 2014, it was $5,500, increased to $10,000 in 2015 and subsequently reduced back to $5,500 in 2016. So if you were eligible to contribute since 2009 but didn’t, your maximum-allowable contribution amount would be $46,500.
  • If you did contribute and made withdrawals, you can re-contribute the full withdrawal amount, which also increases your contribution room. As an example, let’s say that in 2015 you made your first withdrawal of $20,000 from your TFSA and stopped contributing. Now your maximum is $25,500 (adding your 2016 accumulated room and a re-contribution) plus any unused room from previous years, going back to 2009. As you can see, your TFSA contribution room may be much higher than the new $5,500 annual limit.

Don’t go over

  • All TFSA contributions made during the year, including re-contributions, reduce your available room.
  • You can have more than one TFSA but if your total contributions exceed your available room, at any time during the year, you are subject to tax. For example, if you use all of your contribution room in 2016, then make a withdrawal and re-contribute the withdrawal amount in the same year, you have over-contributed.
  • The tax is one per cent of the highest excess TFSA amount in the month, for each month you are in an excess contribution position.

Use it wisely

  • Income earned within a TFSA is not taxed and there are no withdrawal restrictions so it can be an excellent way to help adult children save for major purchases, like a home (the child must be the account holder).
  • TFSAs are also a good retirement income source since withdrawals are tax free and they have no impact on eligibility for federal benefits and credits such as Old Age Security.

There are lots of options when it comes to selecting a TFSA investment type, including cash, mutual funds, securities, Guaranteed Investment Certificates (GICs), bonds and certain shares of small business corporations.

Talk to your professional advisor about incorporating the right TFSAs into your financial plan.

Date reviewed: April 13, 2016

Written and published by Investors Group as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an Investors Group Consultant.