Here’s why the new $6,000 TFSA limit for 2019 is totally worth it
Thanks CRA, inflation can be a good thing.
Recently, our Canada Revenue Agency announced the 2019 inflation factor to be running just north of 2%, which is the used to increase the federal tax brackets from 2018 to 2019 and most federal credits. Combined with prior years’ inflation, that tiny 2% inflation rate was enough to push CRA’s Tax Free Savings Account (TFSA) dollar limit for 2019 to the next $500 interval – which is $6,000 contribution room for 2019.
That’s excellent news for every adult Canadian. Here’s why the new $6,000 TFSA limit for 2019 is totally worth it.
After tax contribution dollars can become tax free – for good!
While you contribute to a TFSA with after-tax dollars, once money is contributed, all income and growth/gains earned inside the account can occur tax-free!
Here are some of key differences between its cousin: the Registered Retirement Savings Plan (RRSP):
|A tax-deferral plan.||A tax-free plan.|
|Contributions can be made with before-tax dollars as part of an employer-sponsored plan or “after-tax” dollars when a contribution is made with a financial institution.||Contributions are made with after-tax dollars.
|Contributions are tax deductible; you will get a refund roughly equal to the amount of multiplying your contribution by your tax rate.||Contributions are not tax deductible; there is no refund to be had.|
|If you make a withdrawal, contribution room is lost.||If you make a withdrawal, amounts withdrawn create an equal amount of contribution room you can re-contribute the following year.|
|Because contributions weren’t taxed when they were made (you got a refund), contributions and investment earnings inside the plan are taxable upon withdrawal. They are treated as income and taxed at your current tax rate.||Because contributions were taxed (there was no refund), contributions and investing earnings inside the account are tax exempt upon withdrawal.|
|Since withdrawals are treated as income, withdrawals could reduce retirement government benefits.||Withdrawals are not considered taxable income. So, government income-tested benefits and tax credits such as the GST Credit, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) aren’t affected by withdrawals.|
|You can’t contribute to an RRSP after age of 71. Accounts must be collapsed in the 71st year.||You can contribute to a TFSA after age of 71.|
|The Summary: part of your RRSP is borrowed money.||The Summary: all of your TFSA is your money.|
The account for every adult
While contributing to the RRSP makes the most sense when your marginal tax rate at the time of contribution is greater than your marginal tax rate at the time of withdrawal – you have no such concerns with the TFSA. As soon as you’re 18 years of age or older, you can have a TFSA. There is no age maximum for this account – you can own one (or many TFSA accounts) as long as you live.
Success holder benefits
Upon death, the entire fair market value of your TFSA can be received by your estate tax-free. Naming a successor holder or beneficiary for your TFSA, the assets can flow directly to the named successor holder or beneficiary without going through the estate; saving probate fees or estate administration taxes.
You can recontribute your withdrawals
It’s true – but be careful! Amounts withdrawn from your TFSA can be recontributed, beginning the following calendar year, without using up TFSA contribution room.
For example, let’s say Mark had contributed the maximum allowable $57,500 to his TFSA like he always could do since TFSA inception through to the end of December 2018. (He did.)
Let’s again assume Mark’s TFSA value is approaching $85,000 because he invested in Canadian dividend paying stocks and didn’t attempt to sabotage his portfolio. If Mark wanted to take, the entire $85,000 out now to buy a new fancy car for an early Christmas gift (he wouldn’t dare) then Mark could contribute $91,000 at the beginning of 2019 – that includes the new $6,000 limit.
TFSA diversification offers a free lunch
It has been said that diversification is the only free lunch that comes with investing – you can take on less investment risk at no loss of investment return through diversification.
Did I mention it was tax-free?!
The TFSA can be used for far more than holding cash. Don’t be fooled by the word “savings” in the TFSA name. These are great things you can do with your TFSA here.
The new $6,000 TFSA annual contribution limit is the latest gift in the CRA package that keeps on giving. I suggest you take advantage of it for all the reasons above and many more.
What do I intend to invest in – inside my TFSA for 2019? Stay tuned to find out. I’ll have a few posts about that in the coming weeks and months.
What are you going to do with the increased TFSA limit for 2019? Do tell in a comment below.