Back in 2009, a wonderful thing was born in Canada. It is the Tax Free Savings Account, or TFSA as it is often referred to. This account can be created and used by anyone over the age of 18, and if you don't currently have one, I highly recommend opening one up right away!
The reason it is such a wonderful thing is because not only does it shelter investments within from taxes on capital gains, but you don't have to pay any taxes if you withdraw from it, either! And, when comparing it to something like a Registered Retirement Savings Plan (RRSP), you don't have to wait until you are retired before being allowed to withdraw from it without penalties.
These tremendous advantages are why I always tell people to fill up their TFSA before any other account. One of the most common questions about TFSAs is "how much can I contribute to my TFSA?" The total you can contribute depends on when you turned 18 years old, how much you've contributed so far and how much you've withdrawn. For anyone born 1991 or earlier, you can contribute the maximum amount to your TFSA. Otherwise, the following table summarizes the total amount of contribution room you'll have.
The annual limit is the additional contribution room allowed for the respective year for anyone eligible to have a TFSA. For example, if you turned 18 in 2005, your contribution room up until December 31st of this year will be $46,500. If you have contributed the full amount, then you can only contribute an additional $5,500 on January 1st, 2017. The annual limit is supposed to rise with inflation in multiples of $500, so I predict that the contribution room will reach $6,000 in 2018 or 2019 at the latest, if you want to plan ahead.
Keeping track of how much room you have left can get complicated once you start withdrawing from your TFSA, or if you have an automatic deposit set up with your employer or bank to deposit a set amount every paycheque. For this reason, I recommend contributing "round numbers" that you can easily keep track of. That might be $500, $1000, $2000 or $5000 increments, depending on your situation. Note your contributions down somewhere so you don't have to think about it. If you have no idea, have not kept track of it up until now or simply want to be sure, you can log into the CRA My Account using either a CRA login or sign-in partners (most major banks are sign-in partners). If you don't have a CRA login or forget it, you can request it and a password will be snail-mailed to your home.
The thing about the CRA My Account page is that it really is only truly accurate on January 1st of each year. That's because they consolidate all your transactions up to the end of the previous year and calculate your remaining TFSA contribution room from that. However, if you make any transactions within your TFSA on even January 2nd, it will not show up until the following January. That being said, now is a great time to make sure you have your login credentials so you can be prepared for 2017 without any doubts.
The last factor, withdrawals, works in an interesting way. Let's say you have been extremely successful and contributed $46,500 to your TFSA up until this point, but your TFSA has ballooned to $80,000 from investment returns. If you withdraw $80,000 from your TFSA right now, you could actually contribute $85,500 on January 1st, 2017. This means you don't get penalized for using your TFSA funds if you have made solid gains but wish to withdraw the money! It should be noted that any withdrawal you make during a calendar year will only be available to re-contribute the following calendar year. Take note of any withdrawals your make so you can add it to next year's annual TFSA limit for your total contribution room. The following formula might help:
2017 Contribution Room =
2017 Annual Limit ($5500) + 2016 Withdrawals + Unused Contribution Room
The last thing I want to go over is what you can do with TFSAs. Some people think that a TFSA is an investment itself, which is incorrect. It is simply an investment vehicle. You can buy GICs, ETFs, mutual funds, bonds (and other fixed income) and stocks within your TFSA. You can also have multiple accounts at any number of institutions, although all contributions have to be within your total contribution limit. But let's say you want to invest in some GICs at your primary bank and have an online trading account with a virtual discount brokerage to buy some stocks. You can have both! I have heard of too many people wasting their precious tax-sheltered TFSA room on savings accounts getting 1 - 2% per year, which might be due to misinterpretation about how TFSAs are simply investment vehicles. I highly recommend having a balanced portfolio consisting of some combination of stocks, ETFs and fixed income instruments within your TFSA.
Treat a TFSA as the proper investment vehicle it can be, and reap the rewards of paying no tax and having the flexibility to achieve your financial goals.