Koroll & Company Blog

Every year the government announces the new contribution limit for tax-free savings accounts (TFSAs). For 2021 the amount will be $6,000 – the same amount set in both 2019 and 2020. Contribution room is carried forward each year. That means the total contribution of someone who has been eligible since the introductions of TFSAs in 2009 and has never contributed is $75,500. 

Annual Contribution Limits 

Unlike registered retirement savings plans (RRSPs), if you withdraw money from your TFSA, the withdrawn amount is readded to your contribution room at the beginning of the following year. 

That means you contribution room at the beginning of any given year is equal to:

Unused TFSA contribution limit + total withdrawal made in this year + next year’s TFSA dollar limit

Example 

You opened your TFSA in 2009. Between 2009 and 2019, you contributed $15,000. That means your contribution limit is 2020 was $54,500 ($69,500 - $15,000). If you withdraw $5,000 from your TFSA before December 31, 2020, your TFSA contribution room at the beginning of 2021 would be $65,500 ($54,500 + $5,000 + $6,000). 

To open a TFSA you must be 18 years or older and have a valid SIN. If you didn’t turn 18 in 2009 than your contribution room will not be the whole $75,500. Instead, your contribution room will be the cumulative annual amounts since the year you turned 18. 

When Should You Contribute To A TFSA 

There are many different reasons you may want to put savings into your TFSA instead of saving accounts, such as an RRSP. What makes the most sense for you will depend on your unique situation so you should always get the advice of a financial professional. There are, however, some general guidelines. 

TFSAs are generally a good choice for …

Taxpayers 71 or Over

If you are over 71, your RRSP has been collapsed and you can no longer make contributions. As a result, if you still want to put 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 Unlike money withdrawn from an RRSP or RRIF, contributions will not reduce your taxable income, but you will be able to make tax-free withdrawals. This includes interest earned on investments – they’ll also be tax free upon withdrawal. 

Taxpayers With Generous Registered Pension Plan (RPP) 

Your annual RRSP contribution maximum is 18% of your previous year's income but this maximum is reduced by amounts accrued under your RPP. If you’re RPP is substantial, your RRSP contribution room may be reduced or even non-existent. 

As a result, a TFSA may be the best, if not only option. 

Taxpayers With Short Term Goals 

If, like many young Canadians, you find yourself considering short-term goals that will likely come to fruition in the next few years, your TFSA is most likely the best option. This may include buying a car, getting married, etc. 

There are two reasons for this. The first is that withdrawals from your TFSA are not taxable. While taxes on withdrawals from RRSP are offset by the initial tax savings on the contribution, you risk paying more in taxes in the long run than if you had used your TFSA. This is because annual incomes tend to increase. When you withdraw, you could be in a higher tax bracket when you made the contribution.   

More importantly, once funds are withdrawn from your RRSP, those funds cannot be replaced. You’ll lose that portion of your contribution space, making it harder to save for retirement. With TFSAs you can replace any amounts that have been withdrawn in the following year. 

One short term goal where a TFSA may not be the best option is if you want to buy a home. That is because RRSPs offer a Home Buyer’s Plan for first time home buyers. 

Low Income Now, High Income Later

If you have low income with an expectation of increased income in the future (i.e. students or someone making a career change), contributing to a TFSA while income is low will allow funds to earn interest tax-free. 

Once you begin making more money you have the option to …

• 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. 

Low Income Now, Low Income Later

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. 

For help deciding whether you should be contributing to your TFSA or to develop a retirement savings plan, please contact our team today.