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For Canadian investors, the new year brings more contribution room to your tax-free savings account. Kind of a big deal, and great news for those of us who want to shelter more of our money from tax. When TFSA’s were first introduced, they were a good idea, but the impact was small because you could only contribute $5,000 per year. Now that they’ve been around for a decade, that amount has continued to grow, and the 2020 TFSA total contribution room is $69,500. Factor in investment returns, and there are more than a few people who are looking at six-figure TFSAs.

If you haven’t opened a TFSA or aren’t sure if it’s right for you, then you’re in the right place. I’m going to tell you why it’s such a valuable tool and how maxing out your 2020 TFSA is almost always a good idea if you can.

Annual Limits

Like anything created by the government, the TFSA contribution limits are not that simple. Take a look at the table below, and you’ll notice some changes over the years. It started as a flat $5,000 per year, but with the promise it would grow with inflation (rounded up to the nearest $500). However, there was one outcast year where the Conservatives increased the limit to $10,000. None of that is significant though; the total is what matters.

2009 - 2012$5,000/year
2013 - 2014$5,500/year
2015$10,000/year
2016 - 2018$5,500/year
2019 - 2020$6,000/year
Total: $69,500

You have to be over 18 to earn contribution room. If you were under 18 in 2009, then you’ll only start building up room in the year you turn 18. It doesn’t matter if your birthday is in January or December; if you turn 18 at some point in that year, you get the room.

TFSA contribution room also carries over, so if you’ve never contributed, you can do the maximum all at one time. And, if you make a withdrawal, you can recontribute the full amount you withdrew the following calendar year. Pro tip: if you need to make a withdrawal, but it’s not time-sensitive, it’s better to wait until the end of the year so you can replace it faster.

Why TFSA’s Are Good

A lot of people like RRSP’s because they give you a tax refund, so it’s almost instant gratification. TFSA’s don’t do that so they can seem less desirable. However, that tax refund sounds a, but the catch with RRSP’s is you have to pay the tax back when you withdraw the money (hopefully in retirement when your income is lower). With TFSA’s, you don’t get that instant refund, but you can pull the money out at any point in the future and pay no tax. If you did that outside of a registered account, you would have to pay tax on dividends, interest, and capital gains regularly. With TFSA’s, you can earn all those things and never pay a penny of tax on it.

If you’re just getting started with TFSA investing, then that might not sound like a big deal. But keep adding and growing it, and it will be apparent very quickly.

How to Use your TFSA

The great thing about TFSA’s is how flexible they are. Because you aren’t paying tax on withdrawals, you can use them to save up a downpayment, for a vacation, for that pony you always wanted, or for your retirement. With the total contribution room growing each year, their popularity as a tool for retirement savings will continue to grow. When I retire, I will likely receive income from both my RRSP and TFSA, along with CPP and OAS.

There’s no right way to use your tax-free; it depends on what you are currently saving for.

One thing to note is that you can have more than one TFSA. Potentially you could earmark each account for a different goal. You want to make sure you don’t get confused though. The penalties for overcontributing are super steep, so make sure you are tracking your contributions closely.

How to Invest Your 2020 TFSA

This is a hard question to answer because it really depends on what the money is for, how long it will be invested, and your risk tolerance.

Like an RRSP or a non-registered account, your TFSA isn’t an investment; it’s an account to hold investments. You can buy stocks, bonds, mutual funds, ETF’s, GICs, etc. or you can hold cash. The thing is,  in order to get the benefit of a TFSA, you need the investments you hold to grow. Cash, while safe and easily accessible, isn’t going to grow. You’ll be lucky to earn a portion of a percent on it. That’s why I recommend you use your TFSA for investments you hope you will grow, and keep your cash holdings (like your emergency fund) separate.

If you are currently focusing on paying off debt and building an emergency fund, then it’s not a bad idea to use your TFSA. But as soon as you are able to start investing, then you’ll want to switch tactics use your TFSA for the investments.

As for timing, now is always the right time to invest. If you have the funds available to top-up your 2020 TFSA then go for it! If you don’t, then invest when you do. Maybe this means waiting for your tax refund, or an annual bonus, or making monthly contributions that align with your paycheque. Don’t hold off on investing because you think you can time the market. You can’t. None of us can.

Takeaways:
  • Total contribution room for TFSA’s in 2020 is $69,500
  • You pay no tax on the money in your TFSA; not now and not in the future
  • You can hold all the same investments you can hold in your RRSP
  • Use your TFSA for investing and not to hold cash
  • Invest when you have the funds available

Do you have questions on the best way to use your 2020 TFSA? Hit me up in the comments, and I’ll happily answer them. Or maybe you’ve been contributed to your TFSA from the very beginning and want to share your success!

It's 2020 and that means your TFSA limit has gone up! Find out what that means and how to maximize your 2020 TFSA.

This post was proofread by Grammarly

Photo by Matthew Henry from Burst

5 Comments

  1. Pingback: My Financial Goals For 2020 – All About The Dividends

  2. Here’s a slightly embarrassing confession: even though I have had a TFSA for a few years, it’s only been in the last few years that I uh…actually really understood what they are. One thing that happened when I started getting serious about debt is I also wanted to really start learning about finance in general. Needless to say, the big take away is that I have not been maximizing the potential of my TFSA. I’m still not, honestly – we primarily use it as a cash holding for our emergency fund (which, when it’s finally refunded at the right level, will move to a HISA) but this is primarily because we are still working on paying off debt. I’m looking forward to when our debt to income ratio is better so we can really realize the max benefits of the TFSA!

    Great primer, Sarah. Appreciate this!

    • Sarah Reply

      Thanks Tara. I don’t be embarrassed, I don’t think most Canadians have a good understanding of TFSA’s and how/when they are valuable.

  3. I started out slowly but really cranked up my TSFA savings once I had a bit more cash on hand. Honestly though, if I hadn’t had an investment advisor who made sure I understood that I could hold mutual funds (or the like) in that account it probably would have earned almost no interest to now. Current balance (not including the 2020 deposit yet to come) is just over $90k so it has grown substantially.

    • Sarah Reply

      $90k is fantastic! Lots of people misunderstand TFSA’s because they are called ‘savings accounts’ instead of ‘investment accounts’ so many people assume you can only hold cash.

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