TFSA Limits for 2016 and beyond

[Slava]

I get asked fairly frequently about TFSAs and how the limit will work going forward. Yesterday the finance minister shed light on how things will work going forward and its reviewed in this article: http://www.bnn.ca/News/2015/12/7/Liberals-detail-how-they-will-roll-back-TFSA-contribution-limits.aspx

Coles notes:

- If you haven't contributed anything to your TFSA you can put up to $41,000 per person into the account for 2015

- This will rise to $46,500 for 2016

- One critical point that hasn't changed is that you can invest these funds into almost anything (stocks, bonds, GICs, ETFs, Mutual Funds). I think they ought to have named this a Tax Free Investment Account instead of Savings because a lot of people think it has to be a straight savings account.

[WilsonFourTwo]

Although I'm disappointed to see the TFSA limit reduced back to $5500, I'm glad they didn't do anything dramatic like retroactively reduce the previous $10,000 limit..

I honestly think that the TFSA is the best (overall) tool for short/mid-term savings, including investments. I've used it for savings (make a few bucks while I'm building towards a goal) and as a tax-free way of investing.

The two things I like about them over RRSPs (which I am a fan of, in general) are that your can hold practically anything in them and that the rules for adding/removing funds are idiot-simple.....makes them a great dumping ground for 'spare' cash.

[pseudoreality]

I agree, great investment vehicle, bad name. I had to work hard to get my wife to invest her TSFA versus have it in a savings account. The government should have spent some of that advertising budget on explaining how they work. Then maybe they wouldn't be 93% underfunded with a 70% hoe ownership rate and record debt.

[Slava]

Well my personal opinion is that the banks are thrilled with the name because people don't realise that they can invest the money in anything. The banks are more than happy to gather assets and pay that 0.0025% or whatever terrible rate they offer (of course with the loss-leader to start it out and make it look better!)

[Finger Cookin]

Heh, hoe owership.

[Johnny199r]

TFSA are great because you don't have to wind them down by 71 like RRSPs.

[MoneyGuy]

You actually don't have to start winding down RRSPs until 72. I'd like to see that age raised.

[Tyler]

Once you max out your TFSA, is the smart thing to do next max out your RRSP? Or is it the other way around?

[Slava]

Its really hard to say for sure, because it really depends on your time horizon and what you are saving for. If the TFSA is being used to save for big ticket purchases or rainy day funds then you shouldn't use the RRSP for those things.

Its not really an either/or kind of thing though. Instead it all comes down to use. I prefer the idea of the longer term tax savings and like the TFSA for that reason. The problem is that the RRSP allows you to save more today because of the tax-deferral. so while its fully taxable when you withdraw the funds, not paying taxes today is obviously good. People really need to be doing both though; either invest your money in an RRSP and then use the tax return to fund the TFSA, or simply split your contributions to take advantage of the TFSA as well as the RRSP. If you can max your RRSP, you should be saving enough in taxes to fill the TFSA though (at least in the highest bracket).

[Tyler]

Much appreciated Vic! Remind me again, do you do tax and financial plan advising, or are you primarily focused on investments?

[Slava]

I'm a full financial planner (CFP) and I do focus on investing. So I'm fully licensed for insurance but the majority of what I do is investments and related planning.