At the beginning of the year, contributing to a Tax Free Savings Account (TFSA) is usually at the top of your mind when it comes to your financial to-do list. And this is for a good reason: it is a phenomenal tax saving tool, afterall. According to recent data, however, it appears that Canadians are not getting full value out of their TFSA. The Canadian Revenue Agency (CRA) released some TFSA stats in 2021. They collected data from 2018, finding that there were 14.6 million TFSA holders that year, representing about 54% of the tax filers for the year.
TFSA adoption and usage are highest among older Canadians, but only 9.6% of TFSA holders have completely maximized their available contribution room. According to the data collected by the CRA, over 90% of TFSA holders aren’t taking full advantage of the TFSA. I’m glad so many Canadians are using TFSAs. But having said that, we get so few tax free tools in Canada, and I’d encourage Canadians to take full advantage of the TFSA. A quick review could help explain why it’s such a useful tool. The TFSA was introduced in 2009. Anyone who has a valid Social Insurance Number and is over the age of 18 can open a TFSA. in 2009, it started at $5,000 per person. Since then, the contribution limit has fluctuated over the years. In 2013, it was increased to $5,500. In 2015, the limit jumped all the way to $10,000 per person. However, that amount was short lived, as in 2016, the limit was reduced back to $5,500. In 2019, it increased to $6,000 per person. For 2023, the limit currently sits at $6,500 per person. If you don’t contribute the full amount to a TFSA in a given year, you don’t lose that contribution room. Rather, it rolls over to the next year. If you were 18 or older in 2009 and have never contributed to a TFSA, your total contribution room would be $88,000. Once the money is in the account, there are a wide array of investments permitted. Stocks, bonds, GICS, mutual funds, alternative investment such as music royalties and infrastructure. There is a large selection of acceptable TFSA investments to consider. I believe the name can be misleading, seeing as it is called a Tax Free Savings Account. However, there is such a large section of permitted investments, it is not really a savings account, it’s more of an investment account. If you contribute more than your available room, you can be penalized for it. There is a 1% per month and it’s charged on the excess contribution amount. If you’re not sure how much contribution room you currently have, you can always check. If you already have an account with the CRA, you can log in and check your TFSA room. As well, you can also check via phone at 1-800-267-6999. You don’t receive a tax deduction for your TFSA contribution, however, once the money is in the account, any growth on investment is tax free. Whether your investment grows by 2% or 7%, all of the growth is completely tax free. As well, you can withdraw the money at any time without tax consequences. Since you’re limited to the amount of money you can contribute to a TFSA, it makes sense to take full advantage of it and invest that money to receive a higher tax free return. Whether it’s a guaranteed investment, stock, bond, or alternative investment, maxing out your TFSA and using it for investing rather than savings is definitely the way to make the most out of the account. Savings are an important part of a financial plan, so don’t get rid of your cash cushion, simply use a different account for your savings and put your investments in your TFSA. Over the long term, your investments will grow at a much faster rate than your savings. The additional tax free growth will compound and provide a boost to your overall financial plan. With limited contribution room, investing in your TFSA is usually the best move. By doing this, you’ll be making the most out of your tax free buck. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning Comments are closed.
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AuthorClinton Orr is a Senior Wealth Advisor and Senior Portfolio Manager with Canaccord Genuity Corp. Archives
July 2023
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