How Much Can I Put in My TFSA & How Is It Calculated?
Understand your TFSA contribution room and how it's calculated to effectively manage your tax-free savings in Canada.
The Tax-Free Savings Account (TFSA) is a registered savings plan established by the Canadian government. It offers a distinct advantage by allowing investment income, such as interest, dividends, and capital gains, to grow tax-free within the account. Withdrawals from a TFSA are also exempt from taxation. This structure makes the TFSA a flexible tool for various financial goals, providing a sheltered environment for savings and investments. The amount individuals can contribute to a TFSA is subject to specific limits set by the government.
Annual Contribution Limits
The Canadian government establishes an annual dollar limit for TFSA contributions. This limit is consistent for all eligible individuals each year. The Canada Revenue Agency (CRA) sets these limits, which are periodically adjusted, often indexed to inflation.
The annual contribution limits since the TFSA’s inception are as follows: $5,000 for each year from 2009 to 2012. The limit increased to $5,500 for 2013 and 2014. In 2015, it rose to $10,000, before reverting to $5,500 for the years 2016 through 2018. From 2019 to 2022, the annual limit was $6,000, then increased to $6,500 for 2023. For both 2024 and 2025, the annual TFSA contribution limit is $7,000.
Determining Your Personal Contribution Room
An individual’s personal TFSA contribution room is the maximum amount that can be contributed. This room is a cumulative figure, calculated by combining the annual TFSA dollar limits from each year since 2009, or since the individual turned 18, whichever occurred later. This accumulation occurs regardless of whether a TFSA was opened or contributions were made.
Withdrawals from a TFSA replenish an individual’s contribution room. The withdrawn amount is added back to the contribution room at the beginning of the following calendar year. This mechanism ensures that the ability to re-contribute withdrawn funds is preserved, albeit with a delay. For example, if $2,000 is withdrawn in October 2024, that $2,000 is added to the contribution room on January 1, 2025.
Re-contributing funds in the same calendar year as a withdrawal reduces the available contribution room. Re-contributing before the next calendar year consumes existing contribution room and could lead to an over-contribution if insufficient room remains. To avoid penalties, it is advisable to wait until the next calendar year to re-contribute withdrawn amounts.
Individuals can ascertain their official TFSA contribution room through the Canada Revenue Agency’s (CRA) My Account service online. Financial institutions are mandated to report TFSA activity, including contributions and withdrawals, to the CRA. This reporting allows the CRA to maintain accurate records.
TFSA contribution room does not accumulate for any year an individual is a non-resident of Canada. Eligibility is tied to Canadian residency.
Consequences of Over-Contributing
Contributing more than the allowed TFSA contribution room results in penalties. The Canada Revenue Agency (CRA) imposes a 1% penalty tax per month on the highest excess amount in the TFSA, applied for each month the excess funds remain in the account.
The CRA typically notifies individuals of an over-contribution by sending a “TFSA excess amount letter” or a “Proposed TFSA excess amount letter.” Upon notification or realizing an over-contribution, immediate action is necessary. The most common step involves promptly withdrawing the excess amount from the TFSA to cease the monthly penalty tax.
The CRA may waive or cancel the penalty tax. This requires demonstrating a reasonable error and prompt corrective action. Tracking all TFSA contributions and withdrawals is important to prevent accidental over-contributions and avoid penalties.