The new federal budget brings some good news for Canadians. One of the proposed change was an increase in the total allowable contribution limit to the Tax Free Savings Account (TFSA). Retroactive to January 1st, 2015 the contribution limit has been increased from $5,500 to $10,000.
This increase gives Canadians saving for their future some extra flexibility in terms of where to invest their funds. This is especially beneficial to those in the lower tax brackets. Canadians earning $50,000 or less may be better served by now investing in a TFSA rather than an RRSP due to contribution limits. The limit for RRSP is currently 18% of a person’s annual income, so for someone making $50,000 for example would only be $9,000, which is now less than the new TFSA cap. Although RRSP contributions are tax deferred, the tax penalties for accessing your funds prior to retirement may deter you from utilizing your money for immediate needs. TFSA however carries no penalties for withdrawing funds. Although in terms of tax benefits, TFSA contributions are not tax exempt or tax deductible, only your investment gains are. So whether you will benefit more from investing in RRSPs for the long term or have easier access to your funds with a TFSA, will be completely up to you. A good retirement plan should likely be comprised of both TFSA and RRSP savings.
- A maxed out investment of $10,000 over 3 years can save you upwards of $3,708 in taxes.
- A person over the age of 18 who has not made any contribution since the TFSA came into effect in 2009 will currently have $41,000 in contribution room.