WHY YOU SHOULD CONSIDER ADJUSTING YOUR BUDGET FOR THE NEW TAX-FREE SAVINGS ACCOUNT INCREASE.
Hear Ye, Hear Ye the 2019 TFSA contribution limit has increased by $500 which a 2.2% inflation increase rounded to the nearest $500 by Revenue Canada jumping from $5500 to $6000 in 2019.
The TFSA contribution limit increase means you need to find an extra $41.66 each month ($500/12) in your budget to keep up to speed with your investment portfolio.
Since the TFSA began in 2009 that means you have the ability to stash away $63,500 totally tax-free as of January 2019.
Not too shabby if you ask me and if you can do it, do it!
Related: What does your retirement lifestyle plan look like?
This increase means Canadians need to find an extra $500 to contribute if they want to keep up with maxing out their TFSA investment.
The new 2019 TFSA contribution limit increase means that Mrs. CBB and I have to come up with another $1000 a year for our investments. For us this is relatively easy as our monthly savings rate is quite steady since we paid our mortgage off back in 2014.
TFSA Contribution Limit
I don’t know many people who don’t need to budget their money and even then those that don’t think they don’t have to, have to.
YES, that makes total sense even to a frugal fanatic like I am.
For some Canadians, this increase may be exciting and for others not so much. Coming up with spare cash to invest in a TFSA can be tough especially after investing in your Registered Retirement Savings Plan.
You might be reading this right now thinking in your head that you are struggling to keep up with normal everyday bills and debts and saving money is not on the horizon just yet.
Ideally reviewing your monthly budget and yearly budget figures will help you to source ways to cut expenses to increase savings power.
If you aren’t budgeting I would urge you to download our free 2019 excel budget sheet and prepare it for 2019 January so you can run with your money instead of having your money chase you.
Knowing where your money is going equals Money Power and it’s a power that can break or strengthen based on the way you handle the oars.
Alternatively, you could come up with a plan to earn an extra $500 cash somehow and put that money towards your TFSA contribution room increase for 2019.
The good thing is that your TFSA contribution room will always be there so if your financial situation changes like mine did you can do a full-on catch-up.
Where can I invest my TFSA?
You can invest your TFSA generally in about 6 different areas such as cash, GIC’s, Bonds, Small business corporations (some), some stock exchange securities and mutual funds.
Related: What should I invest in first? TFSA, RRSP or Non-Registered Account?
Basically, you can invest in the same types of things you do with your RRSP.
The number one key factor with a Tax-Free Savings Account is that contributions are not tax-deductible.
That means they are tax-free which is why if you have the money to invest in a TFSA, but consider maxing your Registered Retirement Savings Plan (RRSP) first.
There are three types of TFSAs that can be offered: a deposit, an annuity contract, and an arrangement in trust. Banks, insurance companies, credit unions, and trust companies can all issue TFSAs. – Revenue Canada
This, of course, is based on your personal financial situation and how much you earn annually.
For example last year I had plenty of RRSP room available and had hardly contributed to my TFSA as I was trying to catch up with my RRSP.
I managed to max out my RRSP and the money that was returned via my income tax return was then re-invested into my TFSA to max that out.
I’m now officially up to speed on both my RRSP and TFSA investing accounts but for 2019 I will have to find a further $500 to contribute.
When you invest in a TFSA as the account holder you are the only one who is allowed to contribute money, withdraw money and determine how you’d like to invest that money.
That being said if you don’t understand what you are investing in or being advised to invest in for your TFSA it’s up to you to ask questions.
TFSA Contribution Room
How much TFSA Contribution room do I have?
That’s a good question and one we struggled to get answers for until we made a call to Revenue Canada and our financial advisor to see just how much we have contributed over the years.
- Your TFSA dollar limit
- Any unused TFSA contribution room from previous years
- Any withdrawals made from the TFSA in the previous
You can also find out how much TFSA contribution room you have by setting up My Account with Revenue Canada (this is what I did), MyCRA, Represent a client (someone represents another: Power of Attorney, Financial Advisor) or by making a phone call to TIPS (Tax Information Phone Service).
Whether you’ve filed an income tax return, benefit return or open a tax-free savings account and you are over the age of 18 your contribution room will begin.
That means that you will always have the room to contribute to a TFSA when you are able and ready to do so.
If you’ve removed money from your TFSA your contribution room will change so it’s important to understand how the system of contribution room works.
Track your TFSA contribution room
What you don’t want to do is over-contribute because then you will be subject to a tax equal to 1% of the highest excess TFSA amount in the month, for each month that the excess amount remains in your account.
My advice is to track your TFSA contributions by yourself so you know exactly how much room you have especially if you open self-directed TFSA accounts where you manage your own investment portfolio.
Even if you do request a TFSA statement that might not always be accurate. The reason being is that your request will only be subject to the information Revenue Canada has current on hand.
Plus, if you disagree with a statement then you have the numbers to back it up which will always be a good thing when it comes to investment contributions.
Also, for those of you who don’t have any earned income you can still contribute as your TFSA contribution limit will be the same. Some people think because they don’t work that they are not able to make TFSA contributions but they can.
You will need a valid social insurance number though to make any TFSA contributions so keep that in mind.
Example
From 2011 until the end of 2015, Josh contributed the maximum TFSA dollar limit each year. He did not make any other contributions or withdraw any funds. As a result of his $10,000 contribution in 2015, his unused TFSA contribution room at the end of 2015 was zero.
His TFSA contribution room at the beginning of 2016 was $5,500 (the 2016 TFSA dollar limit).
On June 15, 2016, Josh made a contribution of $500. On October 26, 2016, he withdrew $4,000.
His unused TFSA contribution room at the end of 2016 was $5,000 ($5,500 – $500).
Josh makes the following calculation to determine his TFSA contribution room at the beginning of 2017:
Step 1: Calculate Unused TFSA contribution room at the end of 2016
TFSA contribution room at the beginning of 2016 ($5,500) minus contributions made in 2016 ($500) = Unused TFSA contribution room at the end of 2016 ($5,000)
Step 2: Calculate TFSA contribution room at the beginning of 2017
Unused TFSA contribution room at the end of 2016 ($5,000) + total withdrawal made in 2016 ($4,000) + 2017 TFSA dollar limit ($5,500) = TFSA contribution room at the beginning of 2017 ($14,500).
So, before you run off to start saving that extra $500 for the 2019 TFSA contribution limit increase consider the above and plan to get in front of your investments and knock debt on its head.
Discussion: What are your thoughts on the 2019 TFSA contribution limit increase? Leave me a comment below.
S.C. Boles says
Single people should be aware that in the event of death, your TFSA is collapsed and becomes becomes part of your estate. Even if you have a named beneficiary who has room in their TFSA the monies cannot be transferred tax free unlike those who have a surviving spouse or children who have been named as beneficiaries. This is grossly unfair and I have sent a letter to my MP to ask her to intercede in having this tax law changed on a point of Tax fairness.
Mo CanadianBudgetBinder says
Thanks for pointing this out. So, if you pass away and have a named beneficiary the TFSA can’t be transferred tax free even if they have room in their TFSA unlike a couple who has a surviving spouse or children. What if your beneficiary was a child and you were single?
S.C. Boles says
To the best of my knowledge you would be okay as long as the child is a named beneficiary and has TFSA room. Having said that, best to contact CRA to confirm
Samantha says
It was about time to increase! Lowering it down from the $10K we had once was a dumb idea, but hey it appealed to the masses who cannot save anything anyway.
Susan Drouillard says
Great news. We max out our TFSAs every year. We also contribute to RRSP and my husband’s 401K in the US.
Mary Campbell says
I am happy to see an increase in the TFSA limit. In our case it means I can tax shelter an extra $500 each of money we have already saved up and have been paying tax on the income it earned. One point you didn’t make Mr CBB is that this doesn’t have to be “new money”. If you can’t find an extra $500 to contribute by the end of the year, consider moving some of your existing savings under the TFSA tax free umbrella. Since there’s no tax on withdrawals if you need the funds…why not tax shelter them?
Also, I like to contribute our TFSA/RRSP funds at the start of every year to take advantage of a longer compounding income period. So, when I budget for our TFSA savings in my 2019 budget – those funds will be contributed in January 2020. I am always saving for the following year so that there’s no last minute scrambling to try and find money, trying to cut expenses nor considering borrowing funds…the way I see many folks do right before the RRSP contribution deadline.