For Canadians, the Tax Free Savings Account is an incredibly valuable investment tool. As the allowable contribution room that increases each year, anyone using this investment tool needs to be aware of the latest contribution limits.
For 2020, the annual contribution increased by $ 6,000.00.
If you have been over the age of 18 since the year 2009, your total lifetime contribution limit is $ 69,500. The chart below shows the annual contribution limits, and a cumulative total. To find your lifetime contribution limit if you were younger than 18 in 2009 (born after 1991), simply add the annual limits of all subsequent years after the calendar year you turned 18.
Contributions vs. Account Balance
There has been some confusion about allowable contributions, especially when investments have grown. Contributions are considered independently of the account balance. This is especially important after the economic boom over the past decade. If you had investments that performed well over the past few years, it is quite possible that your account value has grown to beyond $ 69,500 already. This does NOT mean that you can’t contribute this year. As long as the amount you have contributed, your invested principal, does not exceed your lifetime contribution limit.
Example: TFSA Lifetime Contribution
To highlight this, let’s look at Dominic’s situation. Dominic is a 30 year old Canadian resident, living in Canada on a continuous basis. Born in 1990, Dominic was 19 when the TFSA was introduced, and therefore has the entire lifetime contribution limit allowed.
In 2019, Dominic received an inheritance, and invested all of his allowed amount into his TFSA, the full $63,500. His investments were predominantly stocks, and he saw significant gains over the year. On January 1, 2020, the balance in Dominic’s TFSA account was $ 73,000 - a gain of $9,500 over the year! Dominic hasn’t withdrawn any funds, but is concerned that his account balance is over the $ 69,500 lifetime contribution limit. Fortunately, as a BusinessMinded.ca reader, he knows where to go for information before making any rash decisions.
Looking at Dominic’s situation, we see the following:
Lifetime Contributions: $ 63,500
Investment Growth: 9,500
Understanding that investment growth has no impact on lifetime contributions, Dominic can still contribute $ 6,000 in 2020. This will bring his used lifetime contribution up to the 69,500 limit, while increasing his account balance to 79,000 ($ 69,500 contributions + $ 9,500 investment growth).
TFSA: A Powerful Tool
Understanding how a TFSA works is important for achieving financial freedom. Armed with the right knowledge, a TFSA will play an important part in your financial future. With $ 69,500 in cumulative lifetime contribution room in 2020, there are plenty of ways this powerful tool can be used to drive your personal financial success.