What Does the Increased TFSA Contribution Limit in 2021 Mean For You?

Posted on April 28, 2021

Are you confused by the new TFSA contribution limit in 2021? Don't worry, you're not alone. Did you know that a third of all Canadians are still confused by the TFSA, how much they can contribute, and how it's different from the RRSP? 

But, luckily, you're in the right place because we have everything you need to know about how to secure your financial future. You can't afford to wait any longer to start saving for your future. So, keep reading as we've got the ultimate guide with all the information you need to make educated decisions about your money. 

What Is the TFSA? 

In 2009 the Canadian Revenue Agency (CRA) created the TFSA as a way to encourage people to save more money. The money you contribute to your TFSA account is after-tax money so you do pay taxes on it when you earn it. However, when you withdraw the money, both your contribution and your earnings are tax-free. 

Most people associate the TFSA with their RRSP and lump them both as retirement accounts. However, the TFSA doesn't have to be used solely for retirement. In fact, you can access your TFSA earnings at any time. 

One thing to remember is that once you withdraw the money you do stop earning interest on that amount taken out. However, you can contribute that amount back into your account in a later year. We'll talk about that later in the article in the lifetime limit section. 

As always with compound interest accounts such as your retirement accounts, the earlier you get started the better you will be in the long run. 

And a great benefit of the TFSA is that you don't need earned income to contribute as you do with the RRSP (Registered Retirement Savings Plan). This is why the TFSA account is so great for younger Canadians. 

Who Can Contribute to The TFSA?

The great news about the TFSA as compared to other government retirement accounts is that it's fairly easy to qualify to contribute each year. If you're over 18 and have a Social Insurance Number (SIN), then you qualify. 

You don't need to be an income earner to contribute to your TFSA, so the sooner you can get started the better. As soon as you turn 18 it would be wise to open your first account and get started saving as much money as you can.

The CRA has made it as easy as possible for everyone to save so take advantage and contribute as much as you can as soon as you can. If you live in a province where the age of majority is 19 you will have to wait until 19 to open your account. However, the CRA will adjust your contribution room to include the year you turned 18.

And remember this includes everyone who turns 18 in that year, even if you turn 18 on December 31st. In January of the next year, you're eligible to open your account. All residents with a SIN are eligible to take advantage of this great opportunity right away. 

What Is the TFSA Contribution Limit in 2021? 

Each year the CRA increases the contribution limit to adjust for inflation. At its inception in 2009, the contribution limit was $5,000. And usually, if the limit is increased it is raised by $500 increments. 

The TFSA limit 2021 hasn't changed, as the CRP has kept the limit at $6,000 for the year. This is the third year that the limit has been at $6,000 and many experts theorize that it won't increase again until 2023. 

Another great benefit of the TFSA contribution limit total is that it rolls over from year to year. You will find how much room you have and how to calculate your lifetime limit below. 

How to Save Money in a TFSA Account

Just as it's fairly easy to qualify for a TFSA account, it's also just as easy to start one. In fact, any bank, credit union, or insurance company can be your issuer. In addition, you can also open multiple accounts if you want to spread your accounts out across two different banks. 

However, remember that your annual limit is cumulative between the two accounts and you should not go over your annual TFSA contribution limit. If you do go over your annual limit you will be subject to a penalty of 1% tax on the excess amount. And you will be charged this tax each month that your total contribution for the year is over the maximum allowed. 

So, be sure to work with an issuer you trust and watch your annual contribution total to ensure compliance with the laws. 

When Can You Make Your Contribution? 

The easiest way to set up your contributions is to have your issuer establish an automatic monthly deposit. This way you never forget to make a deposit and if you set it for $500 you know you will hit your maximum limit without going over the 2021 TFSA contribution limit. 

However, you can also deposit a lump sum at any time. And, thanks to compound interest, the sooner you get your money into your account the sooner it can start earning money for you. Remember, any money you earn is tax-free because you've already paid taxes on it so you want this money to grow as big as you can. 

If you're receiving a large sum of money from a relative or your tax refund, consider using this to make a single contribution to make up for any room you might have. 

Where Can You Save Your Money? 

Don't let the name 'savings account' fool you when it comes to your TFSA. This isn't simply a savings account earning a set interest rate each month. 

What you do with your money once you create your account is up to you. Again, unlike traditional savings account your money doesn't have to sit in the bank, even though part of it can. 

The best way to think about where to put your money is to think about how you would normally diversify your investment portfolio. This can be where many people get confused. Is the TFSA a savings account or an investment portfolio?

The answer is that it's a mix of both. You can invest your money and save it for the long term like a portfolio. And this will usually get you the best return on your investment. But you can also treat your TFSA as a savings account and withdraw from it when you need to for a rainy day or to make a large purchase or investment like your next home. 

Just as you would your investment portfolio, it's wise to diversify your TFSA as well. Some places you can save your investment include: 

  • Cash (such as your savings account)
  • Government bonds
  • Stocks
  • Mutual Funds
  • ETFs (Exchange Traded Funds)

Some savvy investors can choose individual stocks that they think will give them the best return on their investments. While others choose to play it safe and use a mutual fund instead. While others may feel that the stock market is altogether too volatile and will want to place more of their money in cash and bonds. 

If this becomes confusing to you, the best course of action is to speak with an expert. They can help you make the best choices for your money and ensure that you're on the right path to financial security in the future. 

What Is the Lifetime Limit? 

The TFSA lifetime limit that you can contribute depends on your age and when you turned 18. If you turned 18 in 2009 then your lifetime limit as of 2021 is $75,000.

So, to determine your lifetime limit, take the year that you turned 18 and add up the limits for each year since then. This will give you the total amount you should contribute to your account. 

The great news about your lifetime limit is that it does roll over each year. Unlike some country's retirement savings accounts, where you either contribute the maximum in that year or lose it. So, take advantage of the many benefits the CRA has put into the TFSA and contribute as much as you can. 

There is no downside to contributing as much as you can up to your lifetime limit. If you need this money later for an emergency, to buy a home, or help send your kids to post-secondary school you can use this money in the best way you need for your financial situation. 

Depending on how long you might live, having this extra savings account can make a big difference in addition to the rest of your retirement portfolio. This is why it's so important to understand your lifetime limit and be sure to contribute the maximum amount. 

What Is the Contribution Room? 

The accumulation of your contribution room starts when you turn 18. To calculate your contribution room use this chart. Determine your total contribution room, then minus any contribution you've made. Remember if you withdraw funds from your account, you can only recontribute them starting from next year. 

All financial institutions with which you have opened a TFSA are required to report your contributions to the CRA. As soon as you file your first tax return the CRA will automatically create an account for you and start your running totals to determine your contribution room. 

You can check with the CRA and see what you have in your account and how much room you have left. However, it is also advised that you keep track of this information yourself. You don't want to miss out on any contribution and you certainly don't want to accidentally go over your total limit as mentioned earlier. 

How Much Can I Put in My TFSA if I've Never Contributed? 

As mentioned in the lifetime limit section you can catch up if you've never contributed to your TFSA account. Let's work out an example scenario to see how much you could contribute if you've never done so before. 

If you turned 18 in 2011 and have never contributed to your TFSA account you could put as much as $64,500 into your TFSA account in 2021.

In 2015 the CRA increased the annual limit to $10,000 after the election. This was a great boost for savers even though it possibly cost the government over a billion dollars in future lost tax revenue.

But, let's say you turned 18 in 2017, which means your lifetime limit if you've never contributed is only $28,500. Compared to your schoolmate who might have turned 18 in 2016. They could contribute $10,000 more than you and have a lifetime limit of $38,500. 

This is why it can get confusing what your limit is. So, to get the most accurate amount that you can contribute to your TFSA account you can do one of two things. First, you can consult the this chart from Wealthsimple, or another trusted source that you can find online, and make calculations yourself.

Or you can speak with a trusted representative at your bank, credit union or insurance company. When you work with a trusted advisor you know that you're getting the best information available. Alternatively, you can wait for your latest CRA Notice of Assessment, it'll provide you with your TFSA and RRSP contribution rooms.

Build Your Savings Now So You Can Build a Better Financial Future

The TFSA contribution limit in 2021 didn't change from last year. However, knowing your limit and room totals can become confusing quickly. So take the time to educate yourself and know exactly what you can contribute this year and next. 

Here at Insurdinary, we value financial education which is why we provide the best information for you. And we're here to help you compare the best financial products.

We will be here every step of the way to give you the best information available so you can make the best decisions with your money. For more great information about how to make the best decision for your investments, check out our government finance articles here

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