The TFSA account is relatively new and often referred to as a younger sibling to the RRSP. The choice of investing in your TFSA or RRSP first is still a debated question but what isn’t up for debate is your contribution amount per year and how much you accumulate in contribution room.
The TFSA contribution limits starts accumulating once you turn 18 unlike RRSP where you need to have income declared to accumulate contribution room. It’s the perfect vehicle to create a passive income machine with dividend investing.
How much you can contribute is based on your accumulated limit and how much you have contributed. Your TFSA contribution room is pretty easy to calculate – check out the amazing calculator below with mind-blowing math.
Annual TFSA Contribution Limits
Here are the limits for each year since inception. The total since the beginning and up to 2020 is $69,500. All of the profits made within a TFSA is completely tax free. The latest increase was for 2019 and the inflation adjustment is not pushing the limit to the next nearest $500 just yet. Future contribution limits are indexed to inflation rounded to the nearest $500.
TFSA Contribution Calculator
It’s pretty simple to calculate your contribution with the table above. The formula is the total for the current year minus your contribution to date minus the total for the year before you turn 18.
For example, if you turned 18 after 2011, the formula would have the following parameters:
- Total for 2020 is $69,500
- Contribution to date, say $10,000
- Total before turning 18 is $10,000
We are left with the following math: $69,500 – $10,000 – $10,000 = $49,500
Now that you can easily calculate your potential and actual contribution room, my suggestion is that you try to keep up with filling up your contribution room if you can. A strong dividend growth approach will easily beat inflation and provide solid returns..
Accessing Your Contribution Details
As soon as you file a tax return, you should have an account with the Canada Revenue Agency and you can always check the status of your contribution room under your account. Financial institutions are required to report the contributions.
You simply need to create an account. It’s pretty useful to have the account and you can manage your direct deposit for your tax return.
You can withdraw tax-free at any time but you cannot contribute that money until the new year. If you were to contribute the maximum over the first few months of the year and then withdraw it in August, you can only add it back come January 1st of the following year.
TFSA Over-Contribution Penalty
If you happen to over contribute, the extra contribution will be subject to a 1% penalty per month. I recently handled an RRSP over-contribution and it’s more paperwork than you want.
If you realize you have over-contributed, quickly withdraw the amount and start filling the forms. Get ahead of it to avoid surprises.
TFSA Growth Opportunity
Having the account is step one in building wealth, the next step is putting your money at work. When you do and you start early, time can do wonders when partnered with compound growth. Below is a graph and table showing the potential growth. Choosing between investing in your RRSP or TFSA first is a good problem to have and the perfect solution is based on your situation. Investing in a RRSP requires diligence in how you handle the tax refund to truly reap the benefits.
Before you think the 10% growth in the table below is not possible, my TFSA market value this November 2019 is $129,467 and November 2018 was at $96,937. Not too far from the numbers in the table I would say. Check out my stock portfolio to see what I hold. Dividend investing is true passive income.
It’s true what they say: “The first million is the hardest!”.
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