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Why You Should Max Out Your TFSA

Investments grow tax-fee. Maxing out your TFSA may be the first goal, before RRSP.

The tax-free savings account (TFSA) became an instant hit with Canadian investors when it was launched in 2009 because of its flexibility and its tax benefits, which allow money held within to grow tax-free. In some ways, a TFSA is similar to a Registered Retirement Savings Plan (RRSP); they’re both investment accounts that have contribution limits and offer tax advantages to investors. And for that reason, they’re incredibly popular. 

 

According to data released by the Canada Revenue Agency earlier this year, there were 20,779,510 TFSAs in Canada and 14,691,280 individual TFSA account holders as of December 31, 2018. 

 

The total market value of all TFSAs at that time was $298 billion, meaning the average TFSA investor had $20,284 in their accounts at the end of 2018.

 

If you have a TFSA (and, if you don’t, you should really consider getting one) you might be wondering: “Should I max out my TFSA?” 

 

Let’s take a look at why maxing out your TFSA might be a good idea. But first, some background on this mighty investment account.

 

What is a TFSA?

 

TFSAs are investment accounts that are available to Canadians who are 18 or older and have a valid social insurance number. 

 

The name tax-free savings account is a bit of a misnomer, since it’s really more of an investment account (I once argued in favour of rebranding TFSAs to tax-free investment accounts, link to article below). But, I digress.

 

A TFSA is like a customizable backpack for your investments. You can toss several different kinds of investments into it, including stocks, bonds, ETFs, mutual funds, and even cash; meaning your TFSA can be as diversified as you’d like. 

 

As your financial goals change, so too can the investments you hold within your TFSA. Have decades to go before retirement? You can heavily load your TFSA with stocks, if you choose. Nearing retirement and want to lower your risk? You can decrease the amount of equities in favour of things like bonds or even cash. 

 

And two of the best features of TFSAs are their flexibility and their tax advantages. Let’s dig a little deeper into both of those.

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Benefits of a TFSA

 

Unlike their closely-related relative, the RRSP, TFSAs permit withdrawals without penalty. So, there’s no limit to the amount of withdrawals you can make from your TFSA – making them a great investment tool for long-, medium-, and short-term investors alike. There are, however, contribution limits with TFSAs. More on that in a bit.

 

Another benefit of TFSAs is their tax benefits. While TFSAs don’t provide tax breaks on money as it's invested (like RRSPs), they do allow the assets held within to grow tax-free. That means you won’t have to pay any taxes on those gains upon withdrawal. 

 

TFSA contribution limits

 

TFSA contribution limits are based on age. Limits start in the year someone turns 18. If someone was the age of majority in or before 2009, they’d have the entire contribution room currently available. If someone turned 18 in one of the following years, they would start building contribution room from that year forward. To help you figure out your contribution room, check out MoneySense’s handy TFSA contribution room calculator

 

The Canadian government announces new TFSA contribution limits each year. Below is a breakdown of contribution limits each year since the TFSA was launched, as well as the cumulative total an investor could have contributed up until those years.



Year

Contribution limit

Cumulative total

2009

$5,000

$5,000

2010

$5,000

$10,000

2011

$5,000

$15,000

2012

$5,000

$20,000

2013

$5,500

$25,500

2014

$5,500

$31,000

2015

$10,000

$41,000

2016

$5,500

$46,500

2017

$5,500

$52,000

2018

$5,500

$57,500

2019

$6,000

$63,500

2020

$6,000

$69,500

2021

$6,000

$75,500



Be mindful of your contribution room; over-contributing beyond your limits will incur financial penalties (the penalty for over-contributing is 1% per month on the over-contributed amount). 

 

It’s important to note that contribution limits aren’t the same as account limits. An investor can hold much more than $75,500 in their account, assuming they’ve maxed out their TFSAs and their investments have performed well. 

 

Why you should max out your TFSA

 

There are several reasons you might want to max out your TFSA. 

 

The tax advantages of a TFSA make it a very attractive option for investing. Since all investments grow tax-free, account holders know exactly how much money they’ll have upon withdrawal. This makes future planning, including retirement planning, simple. 

 

Another reason is the aforementioned flexibility of TFSA accounts. They can be customized to fit your investing goals and allow you to make withdrawals as the need arises. Additionally, unlike RRSPs, TFSA withdrawals can be re-contributed. What that means is, you don’t lose any contribution room upon withdrawal. So, say you’ve contributed the total $75,500 and decide to withdraw it all for a large purchase, such as a home. In the next year following withdrawal, you can re-contribute funds, up to withdrawal amount plus that year’s contribution amount, without incurring penalties. 

 

Another reason to max out your TFSA is that any withdrawals made from an account do not count as income. This is especially important during retirement, since Old Age Security (OAS) benefits are clawed back at certain income levels. Currently, if an individual's 2020 income exceeded $79,054, they would have to repay all or part of OAS. For more information on OAS clawbacks, click here

 

So, withdrawing from a TFSA will not lower the amount of OAS you are entitled to. 

 

The bottom line

 

The tax-free savings account is one of the most powerful and flexible investment accounts available to Canadians today. TFSAs are great for all types of investors – whether they’re thinking short-term or planning for retirement – and they provide many advantages that will help your money grow. That’s why many investors try to max out their own TFSAs each year.

 

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