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What you need to know about contributing to your TFSA this year

Canadian $100 bills are counted in Toronto, Feb. 2, 2016. THE CANADIAN PRESS/Graeme Roy Canadian $100 bills are counted in Toronto, Feb. 2, 2016. THE CANADIAN PRESS/Graeme Roy
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The federal government’s latest TFSA contribution limit increase took effect as of January 1, 2023. This was the largest limit increase implemented since 2015.

Tax-free savings accounts (TFSAs) can hold cash like a regular savings account to earn interest or hold investments such as stocks, ETFs, mutual funds, and more. Any profits earned within a TFSA account are not subject to tax. However, there are limits to how much you can contribute to a TFSA account.

Below, I’ll outline how the government’s most recent TFSA contribution limit increase affects you and how to make the most of it.

How much can you contribute to a TFSA in 2023?

In 2009, the federal government launched the TFSA program to incentivize Canadians to save and invest more money. Today, TFSA accounts are one of the most popular banking accounts offered by financial institutions.

Every year since 2009, the government has steadily increased the contribution room for TFSA accounts, allowing Canadians to save more money over time.

In 2023, eligible Canadians can contribute up to $6,500 more to their TFSAs.

What is the total TFSA contribution room for 2023?

With this year’s $6,500 TFSA limit increase, your total contribution room for 2023 is $88,000 if you qualified for the TFSA every year since its 2009 inception.

To contribute to a TFSA, you must:

  1. Have a valid SIN number;
  2. Be at least 18 years old; and
  3. Be a resident to make TFSA contributions.

As a simple example, if you turned 18 in 2023 and have a valid SIN number and are a resident of Canada, your contribution room would begin that year, so it would amount to $6,500.

If you turned 18 in 2009 or earlier and have a valid SIN number, and were a resident of Canada for every year from 2009 - 2023, your contribution room would be $88,000.

If you didn’t qualify for the TFSA every year, you’d have to deduct that yearly amount from your total contribution room.

For example, if you moved abroad in 2022 and 2023 and became a non-resident, you’ll need to deduct $6,000 and $6,500 from your total contribution room, as those were the contribution limits for those years.

What happens if I don’t use all of my TFSA contribution room?

Your unused TFSA contribution room from previous years can be rolled over to future years.

For example, the TFSA contribution limit for 2022 was $6,000. If you only contributed $4,000 to your TFSA last year, you can contribute an extra $2,000 this year on top of the $6,500 contribution limit for 2023 (for a total of $8,500).

The same applies to any unused contributions from previous years, dating back to when the TFSA program first started in 2009. This is an excellent feature of the TFSA and one that allows for the maximum flexibility of contributions.

What happens if I overcontribute to my TFSA?

The government has strict rules regarding TFSA maximum contribution limits. The CRA imposes a 1% fine for the highest excess amount in the account throughout the course of the month.

For example, if you over-contribute by $1,000 and the money stays in your account past the end of the month, you’ll be subject to a $10 fine every month that it remains in your account.If the $1,000 excess contribution remains in your TFSA from the beginning of the year through to the end of the year, then you will owe a total of $120 in fines to the CRA.

How many TFSA accounts can I have?

There is no limit to how many TFSAs you can have. However, the same total contribution limit applies to you whether you have one TFSA or ten TFSAs.

One benefit I can see of having multiple TFSAs could be that you want to have separate uses for each one. For example, you could have one TFSA for your emergency funds that are held in a savings account and another TFSA for your investments.

With this in mind, it’s simpler to have fewer TFSA accounts as it’s easier to keep track of and manage.

Does the money you put in a TFSA account get taxed?

Despite its name, TFSAs aren’t just meant for holding cash and savings. If your risk tolerance allows for it, it is best used for investing. Here are some examples of the types of investments you can hold in your TFSA:

  • Stocks
  • ETFs
  • GICs
  • Bonds
  • Mutual funds

You aren’t taxed on any money earned within the TFSA account.

For example, if your investments grow by $5,000 in a year, you can withdraw this profit without paying any taxes on it. Additionally, TFSA account earnings don't affect your total contribution limit for the year, as contribution limits only apply to outside money deposited into the account.

For these reasons, I believe that the TFSA is an invaluable investment account and that all Canadians should take advantage of its benefits.

It might make sense to invest in your Registered Retirement Savings Plan (RRSP) before your TFSA if you are a very high-income earner. But for most Canadians, it would be wise to max out their TFSA accounts before considering using another account.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his Wealth Awesome website.

Do you have a question, tip or story idea about personal finance? Please email us at dotcom@bellmedia.ca.

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