According to the Canada Revenue Agency (CRA), only a small percentage of Canadians who hold a tax-free savings account (TFSA) have maxed out their contribution room.

Of the more than 14 million Canadians who have a TFSA account, just under 1.5 million people, or 10%, maximize their contributions. That means the majority of Canadians may be underutilizing this flexible savings vessel.

What is a TFSA?

TFSAs have been available for over a decade to individuals who are at least 18 years of age and hold a valid social insurance number (SIN). Much like other savings accounts, the purpose of a TFSA is to set aside money to earn interest and grow. However, the money you put into a TFSA is tax-free, which is unique.

You can hold a series of different investment options from GICs, stocks, bonds and exchange-traded funds (ETFs) within your TFSA, and any interest income you earn will be tax-free.

Of course, there is one catch—there is a limit to how much money you can place within this account. But as the CRA statistics show, many Canadians aren’t reaching this limit as it stands today, which leaves room for improvement.

How much can you contribute to a TFSA?

The TFSA contribution room is the total amount you can save within your account. Unlike a registered retirement savings plan (RRSP), contributions to your TFSA aren’t tax-deductible.

However, your TFSA contribution room accumulates each year and you can never lose it, even if you withdraw your money.

In fact, even if your funds grow within your TFSA, any money you remove you are allowed to put back in.

For example, let’s say your contribution room is $10,000 and you reach your limit, but your account earns interest and grows to $15,000. You can remove that entire amount and replace it later—even though your original room was $5,000 less than that sum. Your new limit is equal to the value of your investment and its growth while in the TFSA.

How the contribution limit works

Your contribution limit starts the year you turn 18 and continues to accumulate every year afterward.

So, if you were born before or in 1991, you would have access to the most contribution room. Since the start of the TFSA in 2009, the total contribution limit in 2020 is $69,500. However, if you turn 18 in 2020, for example, you would only have a contribution limit of $6,000.

Also, you must account for the contributions you have already made. To figure out how much contribution room you have remaining, subtract your contributions from your total overall limit.

You can also find your contribution room on the Notice of Assessment you receive around tax-time, or you can log in to your CRA My Account to view it there. Though, it won’t account for any recent contributions or withdrawals you’ve made within the current year.

Here is a list of the TFSA contribution room limits for every year since the program’s start.

Year TFSA contribution limit
2009 $5,000
2010 $5,000
2011 $5,000
2012 $5,000
2013 $5,500
2014 $5,500
2015 $10,000
2016 $5,500
2017 $5,500
2018 $5,500
2019 $6,000
2020 $6,000

What happens if you exceed your limit?

Although TFSAs are generally tax-free, if you exceed your contribution room, you will have to pay a 1% tax on the amount over your limit. To avoid these taxes, pay close attention to your contribution room and withdraw the excess funds if you exceed your limit.

How much can you withdraw from a TFSA?

If you solely have cash in your TFSA, then you could potentially withdraw any amount at any time, without restrictions. However, if you have GICs or other investments in your TFSA, then your money may be locked in for a specific period, or you may have to pay a penalty for withdrawing your money early.

Before you contribute again to your TFSA, make sure you recheck your contribution room. If you have maxed out your contributions before making a withdrawal, you will have to wait until the following January before that room is added back to your TFSA.

You can, however, make contributions if you have the remaining contribution room.

Using your TFSA to your advantage

Not only can your TFSA save your from paying tax, but you can also earn interest on your savings. When you put money in your TFSA and let it sit over time, you can take advantage of compound interest and make money faster.

Even small amounts of disposable income placed in a TFSA can be beneficial. Choosing to automate your savings can help kick start this habit. Just make sure you stay within your contribution limit so that you won’t incur taxes.

Hayley Vesh

Hayley Vesh is a creative, resourceful, and knowledgeable content producer who is passionate about financial literacy, storytelling, and generating ideas. She writes about credit cards, savings, debt management, and personal finance. In her spare time, Hayley can be found wandering in the woods, hunting for second-hand treasures, or curled up with a steeped tea and a good podcast.

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