How to Take Advantage of the TFSA Limit Increase

Saving money is good. Finding ways to grow your savings through investments is even better. Saving on taxes while you grow your savings? That is the cherry on top of a great retirement savings plan. Wondering what kind of plan or tax-saving instrument can give you these kinds of triple benefits? Lucky for you, you don’t have to look far. The Canadian government has made it easy to save on taxes while growing your savings with a special savings account called the Tax-Free Savings Account (TFSA).

What is a TFSA (Tax-Free Savings Account)?

A TFSA is a savings instrument that allows you to save or invest your money in eligible investments, such as stocks, bonds, mutual funds, and GICs. The advantage of a TFSA is that you will not have to pay any taxes on the income earned on your investments. This means that your savings can grow tax-free. What’s more, any withdrawals you make from your TFSA account will not be taxed - they are tax-free too!

Who can use a TFSA (Tax-Free Savings Account)?

Any Canadian resident who is 18 years of age or older can open and maintain a Tax-Free Savings Account (TFSA). All you need is a valid Social Insurance Number (SIN). Can you still have a TFSA if you are not a Canadian resident? Yes, you can! You would still need a valid SIN and your contributions will be taxed at 1% for every month that the amount remains in your account.

A TFSA sounds incredible, right? Growing your savings and saving on taxes is a win-win whichever way you look at it. However, there are limits to your investment. You can only contribute a certain amount every year. There is no limit on how much you can earn through the investments made through a TFSA, but you can contribute only up to a certain dollar value. There is no limit on how much you can withdraw either, which is another great advantage of a Tax-Free Savings Account.

What is a contribution limit in a TFSA?

The contribution limit in 2023 was increased to $6500, up from $6000 in 2022.This means that you can put a total of $6500 this year into your TFSA account. You can have more than one TFSA account, but your total contributions across your TFSA accounts must not exceed $6500. Any amount more than $6500 will be taxed. For example, if you have $3000 in one TFSA, you can add up to $3500 in your other account. However, if you add $6500 in one account, it is not a good idea to add any more in your other account as it would mean that you will cross your TFSA contribution limit.

What does TFSA contribution room mean?

Contribution room is the available amount you can still invest in your TFSA account. For example, if you have contributed $5000 in one year into your TFSA account, you still have contribution room of $1500 left for the year. A great thing about a TFSA is that when you make any withdrawals, that amount gets added back to next year’s contribution room. Let’s look at another example to understand this better.

After contributing $5000, later in the year, you need to withdraw $1000 from your TFSA. You’ll still only have contribution room of $1500 left for the current year. However, the $1000 you withdrew will be added to next year’s contribution room. That means $6500 + $1000 ($7500) for contribution room the following year. Pretty great, right?

Another thing to note about Tax-Free Savings Accounts is that the contribution limit from one year carries forward to the next! So, if you contributed $5000 this year, you would be able to contribute $6500 next year, plus the leftover $1500 from this year for a total contribution limit of $8000 next year.

You can calculate your contribution limit easily by considering:

The TFSA dollar limit of the current year
Any unused TFSA contribution room from previous year
Any withdrawals made from the TFSA in the previous year

The contribution limit is changed by the Government from year to year. This is done to keep pace with inflation rates. Usually, the increase is rounded off to the nearest $500. An increase in contribution limits, as made in 2023, has many benefits for saving taxes and increasing your savings. Let’s look at some!

Greater opportunity to save:

The $500 limit increase means you can save even more money than before. It may seem like a nominal amount, but it could mean big things for your investments if you use it correctly. Also remember, the contribution room can be carried forward, allowing you to save more cumulatively over the years. In two years, this $500 will be an extra $1000 that you can save compared to before.

You can reach your financial goals quicker:

Since the investment income you earn within a TFSA is tax-free, you won’t have to pay any taxes on your interest, dividends, or capital gains earned on your savings. As a result, you will be able to grow your wealth in an accelerated manner, allowing you to reach your financial goals much more rapidly than if you had to pay taxes on your investment income.

You can park a greater amount for emergencies:

Since you can make withdrawals from your Tax-Free Savings Account at any time, the increase in limit allows you to save more for emergencies or general expenses, when you really need it. While $6000 was great, $6500 is even better, allowing you a bump of $500 to spend or dip into when you are in times of need.

You can create a savings fund for different goals:

You may use your TFSA to save for your retirement, your wedding, buying a home, or any other purpose. With the increase in the limit, you can save more for your different goals and even multiple goals at the same time. You may even use different Tax-Free Savings Accounts for varied goals. Remember, you would still need to stay under the limit of $6500, but now you have more contribution room to consider and use.

How can you take advantage of the increase in the TFSA limit?

By contributing to a TFSA: The first and most obvious way to take advantage of the increased TFSA limit is to contribute to a TFSA. By contributing the maximum amount each year, you can maximize your savings and grow your wealth tax-free. If you start saving by contributing to a TFSA this year, you can take advantage of your accumulated limit from 2009. Here were the limits from 2012 for reference to calculate your total contribution limit:

The annual TFSA dollar limit for the years 2019 to 2022 was $6,000.
The annual TFSA dollar limit for the years 2016 to 2018 was $5,500.
The annual TFSA dollar limit for the year 2015 was $10,000.
The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.
The annual TFSA dollar limit for the years 2009 to 2012 was $5,000.

Invest in a diversified portfolio: Another way to take advantage of the increased TFSA limit is to invest in a diversified portfolio of investments, such as stocks, bonds, mutual funds, and GICs. This can help you grow your savings and reduce your risk over time. With the increased limit, you have $500 more that you can invest in various stocks, bonds, mutual funds and GICs and get a chance to increase your earnings even further. As you know, these additional earnings will also be tax free.

Get a professional’s advice: If you are unsure of how to best take advantage of the increased TFSA limit, it may be helpful to seek out the advice of a financial advisor. A professional advisor can help you identify your financial goals and create a plan to reach those goals, taking into account your personal circumstances and risk tolerance. They will be able to tell you exactly where and how you can invest your additional limit of $500 so as to get the best returns on your investment, and grow your savings.

As you can see, the increase in TFSA limits is a positive development for anyone who is looking to save more money on a tax-free basis. The increased limit of $6500 provides more flexibility to save for your financial goals and take advantage of the tax-free benefits of the TFSA. However, it's important to consider your individual financial goals and circumstances when deciding which savings options are right for you. Consulting a financial advisor can help you make informed decisions about your savings strategy and ensure that you are taking advantage of all the options available to you.