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Know Your TFSA Limit For 2020

It’s the beginning of the new year and that means extra contribution space in the TFSA. For 2020, the TFSA limit is $6,000 and that’s a lot of money! After ten years of existence, the total contribution limit for the TFSA is now $63,500. That’s for every Canadian who turned 18 in 2009. If you were not 18, then quickly look up the contributions limits on the CRA website to find out how much room you have accumulated your TFSA. The extra contribution space makes the TFSA a very viable instrument to invest completely tax free.

Maintaining TFSA Limits

The limit for the TFSA remains the same as 2019 at $6,000.Unlike RRSP contribution room, where income affects the contribution space, everyone gets a raise in contribution limits for the TFSA. The increase of $500 does not occur all the time. Essentially, inflation needs to accumulate over the years until $500 is reached before the limit increases. The last time an increase in the limit occurred just last year when it was raised from $5,500 to $6,000.

It’s not common for the TFSA limit to increase and we probably won’t see another increase for another few years given how tepid inflation has been.

Automatically Save To Your TFSA

Let’s face it, the majority of Canadians don’t save enough to contribute the entire $6,000 into their TFSA accounts. That’s because many of us struggle with high costs of living in urban areas, ever increasing mortgage payments and wage gains that lag inflation. The expectation isn’t to expect someone to shove $6,000 into their TFSA right now, it’s great if you can, but given the opportunity that presents itself with tax free gains, we should all try.

With the TFSA limit at $6,000, it makes it really easy for us to budget and plan a way to save for our TFSA. Most of us plan our finances on a monthly basis. With the $6,000 limit, it divides perfectly by 12 to be $500. Therefore, it makes sense for every Canadian who wants to take advantage of the TFSA limit to try to save $500 monthly.

The easiest way to save that $500 to your TFSA account is by doing it immediately at the beginning of the month. Set up an auto transfer or payment to your TFSA account from your bank account. Try to live without the $500. To be honest, you might not even realize that its gone. Subconsciously, you may restrain yourself from spending because your savings account does not have as much money anymore.

Use The TFSA Contribution Limit To Invest

The biggest mistake most Canadians make is using the TFSA account as a regular savings account. This should not be how a TFSA account should be used. It’s a complete waste of the tax free benefits that it provides.

The largest obstacle that people face with investing is the lack of understanding. Unfortunately, the personal financial representatives at the bank don’t do a good job of educating the general public. It’s in their best interest to sell products at the bank that charge a lot of fees.

Fortunately, a lot of financial institutions offer low cost solutions to investing in the stock market with lower fees. It’s now easier than ever to invest on your own! The question you might ask is “why should I invest? I don’t like losing money.” It’s true, the stock market is volatile and on any given day it’s possible for the stock market to fall. The alternative is having money sitting in a bank account making a paltry 1.0% in interest.

The reality is money that sits in the bank making 1.0% is no different than losing money because inflation, at 2.5% (or higher if you live in urban cities), is slowly stripping away the purchasing power of the money sitting in the bank account. For certain, a dollar today is going to buy a lot less 10 years from now.

Create A Balanced Investment Portfolio Using Your TFSA

The reason to invest in our TFSA is to keep the purchasing power of our saved money for future use. If a simple savings accounts can’t do it, then what can? The answer is to invest using a balanced investment portfolio using a mix of stocks and bonds.

Investing the money in stocks doesn’t mean that you need to pick a company to buy. This blog has never recommended ordinary Canadians to invest in individual companies like Amazon, Netflix or Apple. Individual stocks are too volatile for ordinary investors. The reward can be great, but our emotions usually get the better of us. Remember how many people lost money on Nortel or BlackBerry? Don’t go chasing waterfalls. The most prudent way to invest is using index funds. Even Warren Buffet says so.

Fortunately, there are many ways to invest in index funds. For beginners and the lazy people, the best way to create a balanced portfolio is to use services offered by Wealthsimple or Tangerine. Both companies offer simple investment accounts that act like a standard bank account. Just deposit money into the account and it will automatically be invested into a balanced investment portfolio. That’s it! No need to understand what to buy. No need to pick what stocks to buy. These accounts will automatically re-balance the portfolio to adhere to the risk profile of the investor.

Increase Your TFSA Limit By Investing

The TFSA contribution limit prevents investors from adding more money into their accounts on a yearly basis. This is by design by the government because they don’t want investors to shelter all their gains from taxes. If everyone invests all their assets in their TFSA, the government would lose billions of dollars in taxes.

Thankfully, most Canadians don’t invest at all in their TFSA. This keeps money in the pocket of the government and out of the pockets of ordinary Canadians. Those that have “figured it out” and invest in their TFSA are labelled as the “rich” by the government. That’s because they want to discourage you from investing in the TFSA account. And we all hate the rich don’t we?

If you don’t invest, most likely you will only have the maximum contribution limit of $63,500. Investors, however, have much more room. How is that the case? When investments gain in value, that gain actually increases the contribution room in the TFSA. It’s possible for those that have invested for a long time to have greater than $100,000 in TFSA contribution space.tfsa limit using tangerine balanced portfolio

The above shows what the contribution limit could be for someone who has invested in a Tangerine Balanced Portfolio. Over the last ten years the average gain of the fund has been 6.92% compounded annually. This means by 2020 the TFSA is over 6 figures! Yikes, how many people have TFSA accounts that big? Probably not many.

Even if the balanced portfolio doesn’t increase by 7% each year and slows to only 5%, that’s an extra $5,000 that can be made each year. Tax free! Compare that to those with a GIC account making 1.0% on the maximum TFSA limit of $63,500. That’s $635 vs $5000. Which would you rather have?

Don’t Waste Your TFSA

This is worth repeating time and time again. Don’t waste the opportunity that’s been given to us by using the TFSA to invest tax free. The TFSA account should not be used as a savings account. Now that the TFSA contribution limit sits at over $60,000, it should be considered as one of the primary vehicles to invest in a balanced investment portfolio.

Don’t use the TFSA as a high interest savings account. It’s a complete waste and only losing its value to inflation. Don’t use the TFSA as a gambling platform to day trade or pick the hottest stock. Those are all speculative plays that will end up like Nortel or BlackBerry. There’s no such thing as fast money unless you are gambling. Don’t mislabel gambling and speculation with investing!¬†They are not the same.

The best way to achieve financial independence is to save diligently, invest wisely and don’t fall prey to your emotions.

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2 Comments

  1. Shawn
    Shawn April 21, 2020

    My understanding was that your limit would only go beyond the regular contribution limit if you took some money out of your account, which you can replace the following calendar year.

    I don’t think that simply holding a fund whose value is greater at year’s end entitles one to increase their contribution limit beyond that allowed by GoC by that difference for the following year (unless they divest, remove money from account, and re-invest the following calendar year.)

    I could be wrong, but I’m pretty sure I’m not.

    Read: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466/tax-free-savings-account-tfsa-guide-individuals.html#P44_1115

    • bkwan
      bkwan April 25, 2020

      Thanks for the comment. To clarify, the amount of new money someone can put into the TFSA is strictly limited by the government. As it stands now, if someone has never opened or contributed to their TFSA the maximum amount is $63,500 if you were 18 in 2009. Now that doesn’t mean people have TFSA accounts that are not higher than $63,500. Once you start investing and the money in the TFSA starts to grow it can exceed $63,500. If your portfolio ends up at $70,000 at the end of the year doesn’t mean your have over contributed. Gains are not the same as adding in “new” money. If you have gains in your account and you don’t pull the money out, the next year you are still eligible to contribute the government stated maximum, which is currently $6000. That means your TFSA limit is now $76,000. This is higher than the $69,500 if you had not invested.

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