It’s the time of year when we plan for the New Year. On our to-do list is mapping TFSA contributions for the next few years.
It’s the time of year when we plan for the New Year. On our to-do list is mapping TFSA contributions for the next few years.
For 2023, the federal Department of Finance has already announced that the TFSA limit will be $6,500, an increase of $500 from 2022.
The federal Department of Finance publishes index adjustments for personal income tax and benefit amounts each year. The index rate is actually the Consumer Price Index, published by Statistics Canada. Most personal income tax and benefit amounts are indexed annually to inflation. For 2023, the indexation rate is 6.3%.
The TFSA is slightly different in that annual adjustments are only made to the nearest $500 increment. Therefore, several years may pass without modification of the annual limit.
For calculation purposes, the annual TFSA limit was initially set at $5,000 and indexed to inflation for each year after 2009. The only exception to this rule was the large one-time increase in 2015.
Here are the annual and cumulative limits:
If you’ve never contributed to a TFSA, the lifetime limit is a significant number. If you were 18 or older in 2009, you can contribute $88,000 to a TFSA starting in 2023 if you’ve never contributed before.
Submissions
Once you’ve figured out how much you can contribute to your TFSA, the next step is how to make the contribution. Below are some options you might consider when deciding how to contribute to your TFSA.
Check or electronic transfer
One of the easiest ways to contribute to your TFSA is to use excess funds that have accumulated in your checking or savings account. You can use these funds and write a check or transfer the funds electronically to your TFSA account.
Account not registered
For clients who have a non-registered investment account, cash or securities can be transferred from the non-registered account into your TFSA. Care should be taken before executing in-kind transfers to ensure that you understand the tax consequences. If a security has a large unrealized gain, the proportionate portion of the gain would be realized when the shares are transferred into the TFSA. On the other hand, if you have an unrealized loss, the loss would be denied under the superficial loss rules if transferred from a non-registered account to a TFSA.
Gifts
The TFSA can be an effective way to split income between family members, such as your spouse or adult children. You can make a donation to help them contribute to their TFSA. Income tax attribution does not apply to TFSA earnings, as they are tax exempt.
Registered Retirement Income Fund (RRIF)
If you are already at the age when you withdraw funds from a RRIF, it may make more sense to make the withdrawal at the beginning of the year rather than waiting until the end of the year.
Prior to the TFSA, if clients did not need the chosen amount for the RRIF withdrawal, it was generally advised to defer the RRIF payment until later in the year. Growing a TFSA is better than growing a RRIF. Any growth in a RRIF is fully taxed when the funds are withdrawn, while any growth in a TFSA is not taxed.
If your RRIF payment is more than $6,500, consider making a partial payment at the beginning of the year to fund the TFSA.
Our approach of contributing early in the year and investing 100% in equities has resulted in substantial growth in TFSA accounts, all tax-free!
As TFSA accounts have grown, so has the need for diversification within the account. Historically, we have invested in individual Canadian stocks in TFSAs. When the TFSA was smaller, we avoided foreign stocks. The underlying reasoning is that dividend income from a foreign country paid into a TFSA could be subject to foreign withholding tax.
If clients are looking to add a US stock, in order to avoid withholding tax on dividend income, they should choose a stock that is more growth oriented and pays little or no dividend income. Growth on US stock is not taxed and can be another investment option to help maximize tax-free growth.
When deciding what to invest in, we encourage you to know all of your investment options. The choice of investment options should reflect your investment objectives, risk tolerance and time horizon. Once these are determined, it is advisable to contribute early.
Kevin Greenard CPA CA FMA CFP CIM is a Portfolio Manager and Vice President, Wealth Management at The Greenard Group at Scotia Wealth Management in Victoria. His column appears weekly on timescolonist.com. Call 250-389-2138, email [email protected] or visit greenardgroup.com/secondopinion.
