The federal government recently announced the TFSA contribution limits for 2023. This year the limit is $6,500. However, you will have accumulated contribution room every year beginning in 2009, so your contribution limit will be much higher if you haven’t used any or all of that reserved contribution room. The only stipulations for contributing are that you must be 18 and hold a valid Social Insurance Number (SIN).
TFSA Contribution Limit
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About the TFSA Contribution Limit
The federal government first announced the tax-free saving account (TFSA) in 2009 to encourage people to save more of what they earned. Essentially it allows your money to grow tax-free as long as you keep it within the TFSA.
Unlike other registered plans, you will not receive a tax benefit for the contributions you make. An RRSP, for example, provides a tax benefit by reducing the total amount of tax you pay. But with a TFSA you get far more flexibility in terms of contributions and withdrawals compared other types of registered accounts. You will also not pay taxes when you withdraw funds from your TFSA. These are just some of the key differences between an RRSP and TFSA.
Every year, the government announces the allowable contribution limit for the following year. These annual limits are generally indexed to inflation rounded to the nearest $500. However, in 2015, a change in the rules by the government of the time almost doubled the TFSA annual limit.
The good news for you is that these contribution limits are also cumulative, meaning if you don’t use your contribution room in one year, it is added to your total contribution limit going forward. If you have not yet accessed this contribution room, the total contribution limit can be substantial, and it can mean an excellent opportunity for you to invest for the long term.
Here are the historical contribution limits for the TFSA:
- The annual TFSA contribution limit for 2009-2012 was $5,000.
- The annual TFSA contribution limit for 2013-2014 was $5,500.
- The annual TFSA contribution limit for the year 2015 was $10,000.
- The annual TFSA contribution limit for 2016-2018 was $5,500.
- The annual TFSA contribution limit for 2019-2022 was $6,000.
- The annual TFSA contribution limit for 2023 is $6,500.
In addition to cash contributions, you can make an “in-kind” contribution to your TFSA with some limitations. If you transfer property such as stocks, for example, they are considered sold, and you must report any capital gain on your tax return. Unfortunately, if “selling” the stock to your TFSA results in a capital loss, you can’t claim that loss on your taxes.
TFSA Contribution and Withdrawal Rules
You can contribute as much as you want to your TFSA as long as you stay within your accumulated contribution limit. If you exceed it, you will have to pay taxes on your over contribution. However all contributions must be made to a TFSA account registered with a bank or other investment firm and reported to the government.
You are free to withdraw from your TFSA at any time and for any reason and you will not pay taxes on these withdrawals.
Withdrawals from your TFSA will also free up room within your TFSA. but only for the following year. For example if you had $10,000 in your TFSA in and took out $2,000 in 2022, your contribution room would be $6,500 (the 2023 allowed contribution) and the $2000 of contribution room you opened with your withdrawal.
Pay close attention to your allowable contribution room. If you over-contribute to your TFSA you will have to pay tax equal to 1% of the highest excess TFSA amount in the month for each month that the excess stays in your account.
How to calculate TFSA Contribution Limit
You can find your TFSA limit on your Canada Revenue Agency (CRA)Notice of Assessment and also online through your CRA My Account. You can also easily calculate your TFSA contribution limit.
To find your contribution limit:
- Start with your annual TFSA dollar limit (for 2023 this is $6,500)
- Add any unused TFSA contribution room since 2009
- Add any withdrawals made in the previous year
Again, you can withdraw from your TFSA at any time, and withdrawals free up more contribution room for you in the future.
How to make the best use of your TFSA
The best way to use your TFSA is to save for a major future purchase or a long-term goal such as retirement. Because the real benefit of a TFSA investment Iies in tax protection for the earnings on your TFSA investment, it is not a good vehicle for short term savings. Even though you can remove funds from your TFSA at any time, if you take the money out too quickly, you will not see any gains, and there will be nothing to protect.
You can put your money into a simple TFSA savings account. You can also leverage GICs for your TFSA investments. However, if you can tolerate the risk, investing in something that offers a better return on your investment, including stocks and other assets, may be worthwhile. A TFSA provides substantial protection for any earnings you make on these types of investments while allowing you flexibility and access to your money when you need it.
Federal Tax Brackets for 2022
For 2023, the federal tax brackets start with:
- 15% on the first $53,359 of taxable income, then
- 20.5% on the next $53,358 of taxable income (on the portion of taxable income over $53,359 up to $106,717), then
- 26% on the next $58,713 of taxable income (on the portion of taxable income over $106,717 up to $165,430), then
- 29% on the next $70,245 of taxable income (on the portion of taxable income over $165,430 up to $235,675), then
- 33% of taxable income over $235,675
TFSA Contribution Limit: Final Thoughts
TFSAs are an excellent investment vehicle for big purchases and long term savings for significant events such as weddings and retirement. There is a tremendous amount of freedom within a TFSA, and unlike other registered plans, you will pay no withholding taxes on the money you take out of your plan
To get the most power out of your TFSA, leverage investments as the current interest rates for most TFSA savings accounts are minimal. Again the TFSA is designed to protect the earnings on your contributions so leverage it to protect the assets where your earnings are highest.
Frequently Asked Questions
You can’t directly contribute to TFSA for your spouse or your children, but you can give them money to contribute to their TFSAs without the government attributing it back to you. The great thing about this is that your family members just have to be over 18, and they do not have to work or earn income to be eligible for a TFSA. This is a great way to encourage young people to save.
One of the reasons why saving money is so hard is because it is never just about the money. Every single one of us as humans have psychological and emotional feelings wrapped up in our finances.
However, you should be aware that you cannot contribute more than your allowable limit to anyone’s TFSA in any given year. Remember that these contributions are also not tax-deductible for you or your spouse or children. However, you will be providing them with a financial gift that can grow tax-free.
TFSAs come in many forms, from simple savings accounts to GICs and other investments. You can hold almost any type of investment in your TFSA that you can hold in an RRSP, including mutual funds, ETFs, bonds, publicly-traded securities and even some private company shares.
You can hold foreign funds and securities in a TFSA as well. However, these will be converted to Canadian currency on the transaction, so be sure you understand current exchange rates to avoid over-contributing to your TFSA. Some foreign dividend income earned in a TFSA can also be subject to foreign withholding tax so keep that in mind when making these kinds of investments.
Finally, capital losses are not eligible for a tax write-off as they are in other circumstances, so if you lose money on your TFSA investments, you cannot recoup part of the loss with tax savings. Be sure to invest only to the level of risk you can currently tolerate.
