The new Tax-Free Savings Account (TFSA) contribution limit for 2021 has now been released, and it is $6,000, which is consistent with the previous two years. This will bring the TFSA dollar limit from $69,500 to $75,500.
If you have previously withdrawn from your TFSA, it is important to remember that any investment gains/losses associated with the withdrawn amount will factor into your total TFSA room. It is always great to capitalize on government saving incentives, but it is important to be aware of your limits and stay within them! While saving within a TFSA is a great way to shelter investment income from CRA, it is very important not to over contribute as CRA imposes a 1% per month penalty on every dollar in the account over your limit. The easiest way to avoid this pitfall is to keep your TFSA dollars all under one roof with your Financial Advisor.
Although TFSA plans have been around for 11 years, we find many people have questions regarding their proper use, and where it should fit within the context of their investment, retirement, or estate plan. A TFSA is a tax-sheltered account similar to an RRSP but differs in the fact that it is funded with after-tax dollars. This means there is no tax deduction at the time of contribution, however, withdrawals, and most importantly the growth, are not taxable.
Therefore, the true power of a TFSA is cultivated when investing for the long-term. Money put into a TFSA can be invested in almost any type of investment (including mutual funds and ETFs). Decisions on how to invest TFSA money are very important, as the ability to capitalize on tax-sheltered growth and compound returns over long periods of time can really add up. Knowing this, you may agree that a TFSA could be considered the worst named product in the financial world. The word ‘savings’ suggests cash in a bank account earning minimal interest, where the true value of a TFSA is promoted when used as a Tax-Free Investment Account.
As with any investment, it is always important to align your TFSA strategy with your long-term goals. Withdrawals later in life have no effect on your taxable income, meaning any clawback of government benefits (OAS, GIS) and your overall tax rate may be minimized if planned appropriately.
Lastly, most clients know the value of contributing to their Registered Retirement Savings Plan (RRSP) over the years, and many have also contributed to a TFSA at their bank but remain unclear on its benefits and how it fits into their overall plan. We would like to remind you that you can open or transfer an existing TFSA to us, which we can set up for you with one of the many investment management companies we deal with. Just like with RRSPs, RESPs, etc. we offer a wider range of options for TFSA accounts than a traditional bank or trust company would and can ensure that the account is invested consistent with your overall plan and goals. It is important to work with your financial planner to understand how your TFSA fits into your strategy.
Disclaimer: Equity Associates Inc. is a registered mutual fund and exempt market dealer in select provinces and does not provide individual Exchange Traded Funds.