The annual contribution limit for the Tax-Free Savings Account (TFSA) has officially been increased to $6500 for 2023. This amount is up from the $6000 limit that was set from 2019-2022.
The annual TFSA contribution amount is indexed to inflation every year and rounded up to the nearest $500. It is not surprising with inflation jumping to 6.3% this year (up from 2.4% in 2022) that the TFSA annual limit has been increased.
The maximum contribution amount for someone who has never contributed to a TFSA, and has been eligible since its introduction in 2009, is now $88,000. To be eligible to open and invest through a TFSA, you must be 18 and have a valid social insurance number (SIN). Your allowable contribution room starts to accumulate at the age of 18.
For those that have withdrawn money from their TFSA, the amount withdrawn is added back to their contribution room the following year. The formula is: Unused TFSA contribution room to date + total withdrawals made in the current year + next year’s contribution limit = TFSA contribution room at the beginning of next year. If you want to check your math, log into your Service Canada account, your total contributions and allowable amount will be posted there.
A lot of people believe the TFSA is only for the rich; however, that is not necessarily the case. A TFSA is an excellent savings vehicle for low-income earners and seniors who can no longer invest in an RRSP.
If you make less than $30,000 and are trying to save for retirement the TFSA is an excellent alternative. RRSP withdrawals are fully taxable when redeemed; so, the difference between the tax savings – when contributing – and the tax paid when withdrawing – may be mute. However, because TFSAs grow tax sheltered and the withdrawals are 100% tax free, for someone who wouldn’t enjoy a huge tax deduction when contributing; may save more tax overall when redeeming money from a TFSA in retirement.
Anyone over the age of 71 can no longer contribute to an RRSP; this rule limits the tax-sheltered investment options available to seniors. Many seniors take advantage of TFSAs; currently they account for almost 20% of all TFSA holders.
The one thing you don’t want to do is over-contribute to your TFSA, if you do a penalty of 1% per month will be charged on the over-contribution. For this reason, I normally recommend to only have one TFSA at one financial institution, that way you can keep track of your deposits and withdrawals and avoid nasty letters from the CRA.
Thank you for taking the time to read my blog, as always if you have any questions or want more information, please don’t hesitate to contact me.
Have a great week!
Tracey
Sources; Article CRA announces TFSA limit for 2023, by Rudy Mezzetta, posted on Investment Executive 11-14-22. Advisor.ca post 8-12-15 by Melissa Shin, with files from Canada Press, Jamie Golombek, Managing director Tax and Estate Planning CIBC Wealth Advisory Services, The Globe and Mail article 7-12-15 by Clare O’Hara Wealth Management Reporter.
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