Tax Free Savings Accounts (TFSAs), which were introduced in Canada in 2009, are savings tools that can be used to optimize your yearly tax planning. Each year, the federal government announces an annual contribution limit, which is added to your limits from previous years.
Unlike Registered Retirement Savings Plans (RRSPs), TFSA contributions can’t be deducted from income in the current year. That being said, when you make withdrawals, you will not have to pay taxes, even if the withdrawal includes interest income, dividends and capital gains earned on your investments.In addition, unlike RRSPs, you can re-contribute amounts withdrawn so long as you wait until the following year to do so.
What are the TFSA contribution limits?
You must be 18 years of age or older to begin accumulating annual TFSA limits. If you are 18 years old or older in 2022 your contribution limit is $6,000. For those who were 18 in 2009 or earlier, their total contribution room is $81,500. If you turned 18 after 2009, your total contribution room will be equal to the cumulative annual amounts since the year you turned 18.
|
Year You Turned 18 |
Age in 2022 |
Max contribution room in 2022 |
|
2009 or earlier |
31+ |
$81,500 |
|
2010 |
30 |
$76,500 |
|
2011 |
29 |
$71,500 |
|
2012 |
28 |
$66,500 |
|
2013 |
27 |
$61,500 |
|
2014 |
26 |
$56,000 |
|
2015 |
25 |
$50,500 |
|
2016 |
24 |
$40,500 |
|
2017 |
23 |
$35,000 |
|
2018 |
22 |
$29,500 |
|
2019 |
21 |
$24,000 |
|
2020 |
20 |
$18,000 |
|
2021 |
19 |
$12,000 |
|
2022 |
18 |
$6,000 |
4 reasons to contribute to your TFSA instead of an RRSP
When deciding whether to contribute to a TFSA or RRSP, there are a couple of scenarios to consider:
#1 - You are 71 or over
If you’re over 71, your RRSP has been collapsed and you can no longer make contributions. As a result, if you are still putting away money for a rainy day, your TFSA is the only tax-sheltered savings option available. Unlike money withdrawn from an RRSP or RRIF, contributions will not reduce your taxable income, but you will be able to earn investment income and withdraw it tax-free.
#2 - You have a generous Registered Pension Plan (RPP)
Your annual RRSP contribution limit is the lower of 18% of your previous year’s income and the annual maximum ($29,210 in 2022). However, this maximum is reduced by amounts accrued in the current year under your RPP. If your RPP is substantial, your RRSP contribution room may be reduced or non-existent. As a result, a TFSA may be the best, if not only option.
#3 - You have short-term goals
If you find yourself considering short-term goals that will come to fruition in the next five years, such as buying a car or getting married, your TFSA is most likely the best option. While you can withdraw money at any time from your RRSP, withdrawals are taxable, increasing your tax owing during the year of withdrawals. Increases in income within that five-year period, could result in a greater amount of tax paid in the long run. In addition, once funds are withdrawn from your RRSP, those funds cannot be replaced, making it harder to save for retirement. TFSAs, on the other hand, allow you to replace any amounts that have been withdrawn in the following year. One exception to this guideline is buying a house. This is because RRSPs offer a Home Buyer’s Plan (HBP) which allows you to withdraw up to $35,000 in a single calendar year to build or buy a house.
#4 - You have low income now, and plan to have high income later
Some taxpayers, such as students, may have low income with an expectation of increased income in the future (i.e. once they graduate or make a career change). In this situation, contributing to a TFSA while income is low will allow funds to earn interest tax-free. Once you begin making more money you can redirect your savings toward an RRSP. At this time, you can either leave your savings in a TFSA, in case funds are needed in the short term, or you can move them to an RRSP for additional tax savings in the year of contribution.
For those who expect to remain in a low-income tax bracket before and during retirement, TFSAs can be a beneficial tool, especially if you will be eligible for benefits such as the Guaranteed Income Supplement or tax credits for senor taxpayers and those with low income (i.e. age amount, sales tax credit, etc.). This is because RRSPs withdrawals, during retirement, are included in taxable income when determining eligibility for such benefits. As a result, RRSP withdrawals could reduce, or even eliminate, the amount you would have otherwise been eligible for. This is not the case with TFSAs.
It is important to remember that these are just a few of the many factors that need to be considered when deciding between a TFSA or RRSP. To find out which option works best for your specific situation, contact us today. We look forward to helping you plan and minimize taxes throughout your lifetime.
