If you have never made contributions to your Tax Free Savings Account (TFSA), you would have a 2014 limit of $31,000. In 2015, the limit will be increased by $5,500 to total $36,500.
The TFSA is a great vehicle that was introduced in 2009 to help Canadians save for short and long term goals.
All deposits into a TFSA grow tax free and can be invested in a wide range of investment products. (i.e. mutual funds, savings accounts and segregated funds)
Canadians should manage their contributions limits carefully, as there are significant penalties for over-contributing.
If you have a growing TFSA account and you make a withdrawal this year, you can replace the full value of your withdrawal in the following calendar year plus the annual addition to the contribution limit. Here is a formula to help you figure out your contribution room for next year:
Unused TFSA contribution room to date + Total withdrawal made in this year + next year’s TFSA additional room = TFSA contribution room at the beginning of next year
Here is an example to clarify this formula. If you have a maxed out TFSA with $31,000 in contributions plus $9,000 in growth and you decide to withdraw the full account value of $40,000 this year. You will have $40,000 in room the following year plus the annual limit increase of $5,500. Making your total contribution limit $45,500. If the value of your TFSA drops and you withdraw the full value, your contribution room falls accordingly.
Less than half of Canadians have a TFSA. They are ideal for saving for a new home, an emergency fund, retirement or even Christmas.
Is it time you took advantage of this great savings vehicle to accelerate your financial success?