While it may feel like you’re being bombarded with RRSP ads encouraging you to make your 2014 contribution before the March 2nd deadline, don’t forget about that other plan – the relatively new TFSA. Now in its sixth year, as of January 1st, you can sock away another $5,500 in your TFSA for 2015. Here are four TFSA tips that investors often overlook.
1. Contribution room is cumulative
For individuals who have yet to open up a TFSA, the cumulative total contribution room now stands at $36,500, consisting of $5,000 for calendar years 2009 through 2012 and $5,500 for 2013 through 2015. Of course, this assumes you turned 18 in at least 2009 (or earlier), the minimum age at which you can contribute to a TFSA.
2. Withdrawals can be re-contributed
Perhaps one of the most confusing rules is how TFSA withdrawals are treated when it comes to figuring out your TFSA contribution room.
The rule can be simplified as follows: the total dollar amount of TFSA withdrawals (which can be a mix of original contributions, income and gains on those contributions) gets added to your TFSA contribution room for the following calendar year.
Still confused? Let’s say Katy contributed the maximum of $36,500 to her TFSA. On May 1, 2015, when her TFSA is worth $50,000, Katy decides to buy a new car and withdraws the full amount. Katy’s TFSA contribution limit for 2016 will therefore be $55,500, consisting of the $50,000 withdrawn in 2015 plus the 2016 annual amount, assumed to be another $5,500.
If Katy were to contribute anything further in 2015, however, she will pay a penalty tax as she will not have the contribution room until next year.
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