How Much Can You Contribute to a TFSA?

The Tax-Free Savings Account (TFSA) is a registered savings plan in Canada. It allows individuals to save and invest money without paying tax on investment income, including capital gains and dividends. The TFSA offers flexibility for various short-term and long-term savings goals.

Understanding TFSA Contribution Limits

The Canadian government sets specific annual dollar limits for TFSA contributions. These limits are adjusted periodically, often indexed to inflation. Each year, new contribution room accumulates for eligible individuals, independent of past contributions or withdrawals.

The TFSA program began in 2009. The annual contribution limits have varied since its inception. For instance, the limit was $5,000 from 2009 to 2012, increased to $5,500 in 2013 and 2014, then briefly rose to $10,000 in 2015. It reverted to $5,500 for 2016 to 2018, before increasing to $6,000 for 2019 to 2022, $6,500 for 2023, and $7,000 for 2024.

Calculating Your Personal TFSA Contribution Room

Determining your specific TFSA contribution room involves more than just knowing the annual limits; it also considers your individual contribution history and any withdrawals. Your personal TFSA contribution room is a cumulative figure that includes the annual TFSA dollar limit for the current year, any unused contribution room carried forward from previous years, and the total of all withdrawals made from your TFSA in the previous calendar year. This carry-forward mechanism ensures that if you do not fully utilize your contribution room in one year, the unused portion is added to your room in subsequent years, indefinitely.

A key aspect of the TFSA is how withdrawals affect your contribution room. Any amount you withdraw from your TFSA in a given calendar year is added back to your TFSA contribution room, but only at the beginning of the following calendar year. For example, if you withdraw funds in December, that amount will not be available to re-contribute until January 1 of the next year, in addition to the new annual limit for that year.

To be eligible to open a TFSA and begin accumulating contribution room, an individual must be a resident of Canada and at least 18 years of age with a valid Social Insurance Number (SIN). Even if you turn 18 partway through a year, you become eligible for the full annual contribution limit for that year. Individuals can find their official TFSA contribution room information through the Canada Revenue Agency (CRA) My Account service, which provides a personalized summary of their available room.

For instance, consider someone who turned 18 in 2009 and has never contributed to a TFSA. Their total contribution room would be the sum of all annual limits from 2009 to 2025. If they contributed $3,000 in 2023, and then withdrew $1,000 in 2024, their contribution room for 2025 would be calculated by taking their cumulative room up to 2024, subtracting their 2023 contribution, and adding the $1,000 withdrawal back to their room for 2025, plus the new $7,000 annual limit for 2025. This ensures that withdrawals do not permanently reduce your overall savings capacity within the TFSA framework.

Rules and Implications of TFSA Contributions

Over-contributing to a TFSA can result in a penalty tax. This penalty is typically 1% per month on the highest excess amount in the account during that month. This tax continues to apply for each month the over-contribution remains in the TFSA.

To correct an over-contribution, the excess amount should be withdrawn from the TFSA as soon as possible. Prompt withdrawal helps to minimize the accumulation of the monthly penalty tax. Ignoring an over-contribution can lead to ongoing penalties and administrative complexities with the tax authority.

TFSAs are designed to hold various types of investments, contributing to their tax-free growth. Holding non-eligible investments within a TFSA can lead to tax consequences, including taxes on income earned from those investments and potential penalties.

Eligible Investments

Cash
Mutual funds
Securities listed on a designated stock exchange
Guaranteed investment certificates (GICs)
Bonds
Certain shares of small business corporations

The treatment of TFSA assets upon the death of the holder also has specific rules. If a TFSA holder designates a spouse or common-law partner as a “successor holder,” the TFSA can generally be transferred to the surviving spouse’s TFSA without affecting their own contribution room. This transfer must occur by the end of the year following the year of death. If a beneficiary is designated who is not a spouse or common-law partner, the TFSA generally ceases to be a TFSA at the time of death, and any post-death earnings become taxable to the beneficiary.