Let’s say you’ve been diligently contributing to your tax-free savings account. Including 2015, your total contributions have maxed out at the allowable limit of $41,000. However, due to interest income and capital gains, the total value of your TFSA is now $60,000. In order to purchase a new car, you decide to withdraw $20,000 from the savings account, leaving the balance at $40,000.
It’s understandable if you assume you can contribute a maximum of $10,000 in 2016, but the good news is that you can contribute much more. How much? In addition to the annual limit of $10,000, the CRA also permits you to re-contribute what you withdrew, which in this case is $20,000. You can’t withdraw the amount and then re-contribute in the same year, but in subsequent years it is allowed. So in our scenario, you can contribute a total of $30,000 to your TFSA in 2016. You don’t just have to take our word for it: we asked Robert Gold of accountants Bennett Gold in Toronto and he says it’s true!
As Advisor.ca succinctly explains it, a simple formula to know your TFSA limit for next year is as follows:
Unused TFSA contribution room to date + Total withdrawal made in this year + Next year’s TFSA dollar limit = TFSA contribution room at the beginning of next year.
In effect, by withdrawing the money from your TFSA, the government grants you the right to ‘freeze’ the total eligible contribution room until such time as you’re ready and able to re-contribute. It’s a way of rewarding Canadians for growing the value of these tax-sheltered portfolios. Heads up: for an easy way to determine your limit without having to do any math yourself, use Ratehub.ca's handy TFSA room calculator.
But Wait, There’s More!
Nancy Woods of RBC Dominion Securities pointed out some other important facts about TFSAs that most people probably aren’t aware of.
First, TFSA contributions are not limited to cash; you can also contribute securities “in-kind”. What this means is that if you own shares of a company in a non-registered account, you can arrange to have the shares themselves transferred into your TFSA. At the point of transfer, there is a “deemed sale” (but not an actual one), which just means that if you have a gain you’ll have to pay tax on it. But once the shares are in the TFSA, they’re tax-sheltered.
Second, death is not an easy topic to talk about, but you should know that upon your death, your spouse (if you have one) can receive all the assets in your TFSA. Just as you did, he or she can enjoy those assets tax-free for life. As Woods notes, these assets don’t affect your spouse’s contribution limits. The National Post explains that this future transfer needs to be formalized in advanced by naming your spouse as a “Successor Holder” on your TFSA documents with the bank.
Third, you can give money to your spouse or your children, which they can then contribute towards their own TFSA. Nancy Woods advises against contributing “in-kind” as this may trigger capital gains taxes.
And finally, just a reminder that TFSAs can be used as savings accounts but the term tax-free savings account is a bit of a misnomer: you can hold many types of investments in a TFSA.
Flickr: Thomas Hawk