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3 things you need to know about your TFSA

Tax Free Savings Accounts (TFSA) have been steadily rising in popularity since their introduction seven years ago. With more than 11 million Canadians calling themselves holders, the TFSA has come a long way in a short period of time.

We all know the perks and it’s probably why you initially invested. Here are three more features of TFSAs that you may not be aware of:

1. Beware of WHEN you pay back any funds you withdraw from your TFSA.

Let’s start with this: the maximum amount you can contribute to your TFSA this year is $6,000.

So based on the current contribution limit, let’s say you deposited $6,000 into your TFSA on Jan. 1, 2020. And then on March 1, 2020, you withdrew $3,000. This “frees up” $3,000 in contribution room.

Now, you may think that putting that money back into your TFSA is as simple as making a new $3,000 deposit sometime during 2016, because that would take you back to $6,000 -- which is the annual limit. Makes sense, right?

Unfortunately, that’s not the case. According to the Canada Revenue Agency, you’ll have contributed $9,000, based on the $6,000 you contributed on January 1, 2019 and the $3,000 you contributed later in the year. In other words, the CRA doesn’t recognize withdrawn amounts when it calculates your annual contribution total.

As a result of the over-contribution, the CRA may penalize you.

What can you do to avoid all of this? The answer may not be all that logical, but it’s simple: if you withdraw funds from your TFSA, then don’t put them back until the following year. So in the scenario above, you wouldn’t put the $3,000 that you withdrew from your TFSA on March 1, 2020, back into your account until 2021 (or any year after that).

2. You can invest your TFSA in a variety of ways – not just a savings account.

By virtue of having the words “savings account” in the term “Tax Free Savings Account,” some people believe that the only investment they can have with a TFSA is the SA part (“savings account”). But that’s not the case at all!

You can have a wide variety of investments in your TFSA, including mutual funds* and GICs, among others.

3. You can carry unused TFSA contribution room forward.

Thankfully, contributing to your TFSA is not a “use it or lose it” thing. In other words, if you don’t maximize your contribution during any given calendar year, you will be able to carry that unused amount to the next year, the year after…and so on.

For example, let’s say that in 2009 (when TFSAs launched) you deposited $1,500 into your TFSA, and haven’t made a contribution since. That means in 2020 you’ll be able to contribute:

  • $3,500 for 2009
  • $5,000 for 2010
  • $5,000 for 2011
  • $5,000 for 2012
  • $5,500 for 2013
  • $5,500 for 2014
  • $10,000 for 2015
  • $5,500 for 2016
  • $5,500 for 2017
  • $5,500 for 2018
  • $6,000 for 2019
  • $6,000 for 2020
Add it all up, and you could contribute $68,000 to your TFSA in 2020.

You can also use back contribution room after opening a TFSA as well. If you start a TFSA today, it will also have $52,500 in contribution room (provided you were 18 years old in 2009).

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