The Complete Guide To TFSA Contribution Limit In 2021

The TFSA contribution limit for 2021 stands the same as 2020 at $6000. With the new contribution and mount in place, it is possible to set aside some money in eligible investments and ensure tax-free growing’s throughout the lifetime.

The TFSA does allow tax-free earnings of capital, dividends and interest. It is also possible to withdraw the amount tax-free from TFSA savings at any point in time and for any reason.

It was Jim Flaherty, the former Canadian Federal Finance Minister who had introduced this tax-free savings account in 2008. As per C.D. Howe Institute, this was an exciting tax policy measure taken by the government.

It also got support from Bank of Montreal, Canadian Bankers Association, Canadian Taxpayers Federation, Canadian Independent Business Federation and Canadian Commerce Chamber.

TFSA Contribution Limit 2021

It is the CRA that tends to determine the TFSA Contribution Limit amount that can be deposited into the TFSA accounts annually. Even if it is not used, the limit accumulates with time.

The annual limit for 2021 is $6,000, while $75,500 is the cumulative limit. What does this mean for you?

Let us look at the TFSA account contribution limit over the years :

Years	TFSA Annual Limit	Cumulative Total
2009 – 2012	$5000	$20000
2013  – 2014	$5500	$31000
2015	$10000	$41000
2016 – 2017	$5500	$52000
2018	$5500	$57500
2019	$6000	$63500
2020	$6000	$69500
2021	$6000	$75500

• If the TFSA amount has not been withdrawn last year, then in 2020, the cumulative $69,500 limit can be contributed minus the already contributed amount.

• If no TFSA’s exist, then $69,500 of the full limit can be contributed this year.

• Also, If the TFSA amount has already been withdrawn last year, then a $69,500 cumulative limit can be contributed this year, minus the amount already contributed, minus the amount withdrew last year.

Several TFSA options are available to meet the specific needs of investors, including term deposits, savings accounts, stocks & bonds and mutual funds.

TFSA or RRSP?

This is a question asked by many and a very important one too!

Both TFSA (Tax-Free Savings Accounts) & RRSP (Registered Retirement Savings Plans) do provide lots of beneficial features to help people save money for their retirement or to meet other savings objectives.

Getting to know about the pros & cons of both can help you to make the right decision.

TFSA Pros

• This tool allows you to invest in different products and enjoy complete tax-free returns. Funds can also be drawn from the TFSA account whenever desired and this amount will not be added to the income tax.

• No fees are charged at the branch level upon the withdrawal of funds at the financial institution. However, some accounts may invite charges like investment advisor accounts.

• If the choice is to be higher or within the same income bracket during retirement years, then TFSA is a better choice.

• It can act similar to that of an estate tool allowing passage of tax-free funds to the family members and thereafter.

TFSA Cons

• For the Invested amount, no break is received on income tax. Hence, those who need to meet the annual income tax bill or are self-employed or perhaps investing in retirement to save on income tax may find RRSP to be a better choice.

• No withdrawal restrictions apply unless stipulated by TFSA investment products. Hence, TFSAs are treated by many as a savings or checking account, making regular withdrawal and deposits. However, the amount to contribute is bound by legal limits.

• Funds can be easily ‘borrowed’ from long-term savings, thereby losing benefits offered on compound interest.

RRSP Pros 

• An excellent retirement savings tool, allowing to invest and promotes growth.

• Non RRSP investments invite tax payment twice a year, on initial income and income from other investments. But with RRSP investment, an income tax break can be enjoyed on the invested amount and then on the remaining amount in RRSP.

• The time a final withdrawal will be done from the RRSP account, you will be in a lower tax income bracket and be retired. Gains are also sheltered.

• Early withdrawal of money is allowed from RRSP in two instances without inviting additional income tax. One being when purchasing the first home, where withdrawal limit is $25,000 without tax or penalty and 15 years repayment time. To pay post-secondary education, RRSP withdrawal invites a similar exception.

RRSP Cons 

• The withdrawal amount is taxable income at a higher rate, if before retirement.

• RRSP withdrawal before retirement invites a higher tax. You also lose the benefits derived from income sheltering in the RRSP on an early withdrawal. Also is to be paid withdrawal fees.

• RSP room is lost on withdrawal of funds and it cannot be replaced unless withdrawal was meant for education or buying a home.

In short, both TFSAs & RRSPs are excellent long-term investment tools.

Best Canadian TFSA Savings Accounts Right Now

Once the decision is made to invest in TFSA, the next step will be to search for the top banks that offer the top TFSA savings account.

• Motive Financial Motive Savings Account: It offers competitive rates of 2.4% along with unlimited free transfers and withdrawals.

• Alternate Bank Savings Account: It offers a 2.35% interest rate including unlimited free debits and withdrawals. It does not invite any monthly fee or minimum balance required. An account can be opened from anywhere in Canada.

• Implicit Financial TFSA: It offers a 2.4% interest rate along with one monthly withdrawal and unlimited deposits.

• Tangerine Tax-free Savings Account: The rates offered for new clients are 3% for the initial 182 days and thereafter at 1.25%. For current clients, it is 1.25%. It does offer unlimited free transfers, no maintenance of minimum balance or fees.

• BMO Savings Account: For the TFSA account, Bank of Montreal offers a 3.25% promotional rate. But after 15^th March 2020, the rate is likely to drop to 0.75%.

• CIBC Tax-Advantage Savings Account: New deposits are offered a 3% promotional rate. On completion of the promotion period, the offer is likely to drop to 1.15%.

Why Choose TFSA Over RRSP? Top 5 Reasons 

This is a wonderful savings vehicle although its contribution limit has been reduced by almost by half. Some reasons to have a TFSA account are as follows:

• Maxed out on the RRSP contribution room: TFSA is a wonderful choice if the plan is to reduce the tax amount. If 71+ in age, then RRSP contribution is restricted.

• If you turn 71 by December 31 of a year, then you are required to use the RRSP funds to purchase an annuity or withdraw the entire amount from RRSP to convert into RRIF (Regd. Retirement Income Fund). TFSA contribution allows tax shelter.

• Reduce taxes on investments made: Taxes are to be paid on any earned interest income if from the non-registered investment account or GIC in a non-registered account. Investing $5,000 to make the annual interest of $100 will not invite tax. Benefits can be derived from stock investments in TFSA.

• Be in higher tax bracket after retirement: Although you’ll be in the lower tax bracket after retirement, some low-income citizens might avail of higher income as they start receiving OAS (Old Age Security) & Canada Pension Plan benefits including GIS (Guaranteed Income Supplement). TFSA withdrawals will not reduce income-tested benefits.

• Avail more contribution room annually: To avail contribution room in RRSP, income needs to be earned. With more earnings, it is possible to derive more contribution room to the annual maximum which in 2016 was $25,730. Additional contribution room can be enjoyed with TFSA, even if income is not present. Also, a similar additional contribution room amount can be availed annually like other 18+ age citizens. 

• Greater flexibility: Although not a typical savings account, the TFSA allows investment in GICs, bonds, stocks and mutual funds. It can also be used to create retirement savings, to buy a home or to come up with an emergency fund, or all the three.

• When withdrawal is concerned, it is possible to withdraw any amount. There is no need to re-contribute the withdrawn amount. If maxed out of TFSA and the desire is to re-contribute the availed amount, then you need to wait till the start of the next year to do so.

Key Features & Investment Rules For The TFSA Contribution Limit

There are certain key features and investment rules that govern the TFSA’s. Let us take a quick peek of them here: 

• Tax Treatment: It is from after-tax income that contributions are made. But earnings within account and withdrawal do not invite tax.

• Eligibility: Citizens above age 18+ and having valid Social Insurance Number provided by the government authority and a resident of the country are eligible for TFSA. A non-resident can also open up TFSA account for income tax purposes with valid SIN, but with a monthly tax of 1% to be paid to ensure contribution remains within the account.

• Annual contribution limit: As of 2019, it is $6000 annually, raised from $5,500 last year’s limit.

• Over-contribution penalty: If more than the allowable limit is contributed to the account accidentally, it invites a tax penalty of 1% of the highest TFSA excess amount in the month for every month until in excess contribution position.

• Withdrawals: Funds can be withdrawn at any point in time. The withdrawn amounts in any given year can be added back the next year to the contribution room, irrespective of the withdrawn amounts are from investment earnings or original contribution.

• Contribution room carry-forward: It is possible to carry forward and use all unused contribution amounts. If contributions were never made to the TFSA and in 2009, if you were 18+, then in the contribution room as in 2019 you will have an accumulation of $63,500.

Final Words

There you go, that was my take on the TFSA Account, its Pros and Cons as well the contribution limit over the years, RRSP, RRSP Pros and Cons and comparing both the TFSA and RRSP in one shot. 

As I said before, RRSP is the instrument of retirement savings for Canadians and you can utilize it as a first time home buyer maybe, but it is not recommended.

When it comes to investing in the TFSA, you can save taxes on the dividends you earn as well the capital gains are tax-free. My recommendation is to max out your TFSA’s every year with the new limit you get. If you haven’t been investing in the TFSA since 2009 you have a greater chance to invest more and more until you max out the limit. 

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Thanks for reading.