With less than two weeks to go until 2019, now is the time to put together an action plan for that first week in January during which you should remind all of your clients, no matter their age, about the increased annual TFSA dollar limit to $6,000, which comes into effect on Jan. 1.
The TFSA was first introduced in the 2008 federal budget and became available to Canadians for the 2009 calendar year. The initial TFSA dollar limit of $5,000 rose to $5,500 for the past few years, with a short-lived flirtation at $10,000 in 2015.
Under the tax rules, starting in 2016 and for each subsequent year, the annual TFSA dollar limit was fixed at $5,000, indexed to inflation for each year after 2009, and rounded to the nearest $500 to make the annual limits easy to remember. The inflationary increase for 2018 was 2.2% and was enough to push the TFSA dollar limit for 2019 to next $500 increment, or $6,000.
The increase will put the cumulative total dollar limit at $63,500. That means someone who was at least 18 years of age in 2009 and never contributed to a TFSA could put in the entire $63,500 in January — or $57,500 today.
In honour of the TFSA’s upcoming 10th anniversary, here are my three top reasons why almost every Canadian should consider a TFSA:
1. TFSAs really are tax-free
Although we contribute to a TFSA with after-tax dollars, once the funds have been contributed, they grow tax-free, for life. In other words, all income and gains, whether realized or unrealized, will never be taxed while in the plan and the funds in the TFSA may be withdrawn tax-free at any time, for any reason.
In addition, because TFSA withdrawals aren’t considered to be income, they don’t impact income-tested benefits and credits — such as the guaranteed income supplement, old-age security payments or the age credit — negatively.
In fact, even upon death, the entire fair market value of the TFSA can be received by the estate tax-free. And if the successor holder or beneficiary is named on a TFSA, the assets can flow directly to the named successor holder (limited to a spouse or partner) or beneficiary without going through the estate, which could mean potential savings on provincial probate fees or estate administration taxes.
2. Contributions can be made at any age
To contribute to an RRSP, an individual must be 71 years of age or younger and must have “earned income,” which is typically employment or rental income. Contrast that with the TFSA, for which there is no age limit and no earned income requirement.
One popular strategy that has emerged is for seniors, who are required to withdraw a prescribed minimum amount annually from their RRIF at age 72, to recontribute any after-tax withdrawals not needed to fund living expenses back into a TFSA for tax-free retirement accumulation.
3. Withdrawals can be recontributed
TFSAs offer enormous flexibility, which is something we don’t generally have with RRSPs. That’s because any amounts withdrawn from a TFSA can be recontributed beginning the following calendar year without using up TFSA room.
This cannot be done with an RRSP without exhausting available contribution room, based on earned income. (There are exceptions for amounts withdrawn under the Home Buyers’ Plan to buy a first home or the Lifelong Learning Plan to fund post-secondary education.)