Arguably, TFSA is a bit of a misnomer. It would have been better head it been called a “tax-free investing account”. But why so? It is not a savings account at all. Instead, your savings grow tax free and you can hold various investment vehicles. Whether you are saving for your first home or a huge purchase, a TFSA can help you get there. Once you have opened a TFSA, you can contribute at any time and earn returns or interest, tax free—unlike in a non-registered savings account.
What Is The TFSA Limit for 2022?
The annual TFSA limit for 2022 is $6,000. The federal government may change the TFSA contribution limit from year to year. Although that limit increase has varied, it’s generally increased in line with inflation.
If you want to start or continue enjoying tax-free earnings, there is no better time to plan for your next TFSA contribution. But do you know your contribution limit? Read on to learn more about the TFSA contribution limits for 2022, the rules, and how you make the most of this savings and investing tool.
What Is A TFSA?
In the 2008 budget, the government of Canada initiated a new personal savings vehicle, the TFSA, to help you save for different goals throughout your lifetime. Since January 2009, Canadians have been able to contribute to a TFSA that can hold any combination of eligible types of investments, including cash, bonds, stocks, mutual funds, exchange-traded funds (ETFs), and guaranteed investment certificates (GICs), whose growth remains tax-sheltered.
Simply put, a tax-free savings account is a registered savings or investment account that grows your money tax free. Should you use a TFSA as an investment vehicle, your investment income and capital gains will remain tax free.
You can open a TFSA account if you are a Canadian resident with a valid Social Insurance Number (SIN). You must have attained the age of majority—18 or 19 years of age—depending on your province. There is no limit to the number of TFSAs you can open, but there is a cap to the amount of money you can contribute. Luckily, you do not need to earn an income to contribute.
Since you have already paid taxes on the money you put into a tax-free savings account, you will not part be taxed again when you take your money out.
Benefits Of A TFSA
A TFSA lets you enjoy the following benefits:
- Tax-free earnings. A key benefit of a TFSA is that all investments inside the account grow tax free. This means that any interest, dividend income, or capital gains you earn within the account are not taxed.
- Tax-free withdrawals. Although you have already paid income tax on the money you contribute to a TFSA, you will not draw a penalty or incur taxes for any eligible gains when you withdraw your funds. You can also withdraw your savings at any time and for the purpose of your choice.
- Contribution flexibility. There is no limit to the number of TFSAs you can open, but your total contribution cannot exceed the maximum contribution limit allowed. If you do not contribute the maximum amount allowed in a year, your unused TFSA contribution will be carried forward to the next year.
- Various investment options. A TFSA lets you hold any combination of eligible investments, including stocks, bonds, ETFs, mutual funds, guaranteed investment certificates (GICs), and cash.
- Does not affect government benefits. When you retire, any money you withdraw from a TFSA will not count as yearly income. Your TFSA will not trigger clawbacks on federal income-tested benefits you receive from government programs, such as the Canada Child Tax Benefit, Guaranteed Income Supplement, and Old Age Security benefits.
What Is The TFSA Limit In 2022?
According to the Canada Revenue Agency’s TFSA dollar limit announcement, your TFSA contribution limit for 2022 is $6,000. You can make your contributions anytime during the year, either as a lump sum or periodically. The annual TFSA limit may change from year to year, as demonstrated in the table below.
How Is The Contribution Limit Determined?
The annual TFSA contribution limit changes from year to year. While the contribution limit for 2022 is $6,000, you may have more breathing room depending on your previous contributions. However, the maximum amount you can contribute to a TFSA is limited by your TFSA contribution room. The maximum contribution room is usually per person and not per account, so having multiple TFSA accounts will not increase your contribution room.
The total contribution room is usually the sum of the following:
- Your TFSA dollar limit of the current year
- Total unused contribution room from the previous year(s)
- Withdrawals made in the previous year
Any unused contribution room from one year is carried forward and added to the TFSA contribution limit of the following calendar year.
For instance, if you are only able to put $4,000 toward this year’s contribution limit, the $2,000 balance will be added to your annual contribution maximum for the following year, increasing it to $6,000. The balance carries forward into future calendar years until you reach the maximum contribution. So, if you are a Canadian resident who has never had a TFSA and were at least 18 in 2009, you can contribute up to $75,500 in 2022, because your unused contribution for those years has been consistently carried forward.
Any withdrawals made from your TFSA are added back to your contribution room at the beginning of the following year. For example, if you took $2,000 out of your TFSA in 2020, you can go ahead and reclaim the $2,000 contribution room this year.
Depending on the investments you hold in a TFSA, you may incur a loss in your initial investment. Any investment losses within your TFSA are not considered a withdrawal and therefore do not count toward your contribution room. For exmaple, if you lose $500 in your TFSA ad have hit your maximum contribution, you cannot contribute an additional $500
The Canada Revenue Agency tracks your available contribution room and reports the amount through the “My Account” function on the CRA website.
What Happens If I Over-Contribute To My TFSA?
Any contribution to your TFSA beyond the maximum allowable amount is considered an over-contribution. If you contribute more than your available TFSA contribution room at any time in the year, you will incur a tax penalty of 1% of the excess amount every month that this excess amount sits in your account. The 1% tax penalty will remain in effect until one of the following happens:
- You withdraw the entire over-contribution amount.
- Your unused contribution room in the following year absorbs the excess contributions.
You can only recontribute or replace a portion or all your withdrawals into a TFSA in the same year if there is available TFSA contribution room. If you proceed to recontribute with no contribution room, you will have overcontributed to the TFSA in that year. Be sure to review past and current limits before opening and contributing to a TFSA.
What If I Can’t Contribute The Maximum Contribution Room Amount?
If you cannot meet the maximum allowable contribution room amount in a year, you can still catch up in the future. You can carry forward any uncontributed amounts into future years indefinitely. For 2022, you can contribute up to $6,000 (the year’s annual contribution limit) plus any unused contribution room from 2020.
How To Make The Most Of Your TFSA
Here are some steps you can take to ensure that you are getting the most of what a TFSA offers:
- Max out the contributions. Understand your contribution limits and invest within them. In 2022, the maximum you can contribute to your TFSA is $6,000. If you have not already funded your TFSA, you may be able to contribute up to $75,500 based on the year in which you turned 18 years of age.
- Hold the right investments. Ensure that the investment vehicles you hold in a TFSA align with your investment horizon and risk tolerance. Mutual funds, ETFs, and stocks make excellent choices if you are saving for retirement.
- Start early and save often. Taking advantage of your TFSA as soon as possible is the key to growing your savings and investments. The earlier you start depositing money into the TFSA, the more time there is for your money to grow tax free.
Whether you are saving for a vacation, your first home, or a big purchase, a tax-free savings account is the best tool to help you get there. If you have attained the age of majority, you can open as many TFSAs as you want. However, your contribution room does not change; instead, it is shared among all accounts. Understanding the rules and knowing the limits will help you make the most of your TFSA without drawing penalties.