The complete guide to the TFSA contribution limit in 2021

The TFSA contribution limit for 2021 is the same as in 2020, i.e. $6,000. With the new contribution and amount in place, it is possible to put money aside in qualifying investments and ensure tax-free growth throughout life.

The TFSA allows for tax-free capital gains, dividends and interest. It is also possible to withdraw the tax-free amount from TFSA savings at any time and for any reason.

It was Jim Flaherty, the former Canadian Federal Minister of Finance which introduced this tax-free savings account in 2008. According to the CD Howe Institute, this was an interesting tax policy measure taken by the government.

He also gained support from the Bank of Montreal, the Canadian Bankers Association, the Canadian Taxpayers Federation, the Canadian Federation of Independent Business and the Canadian Chamber of Commerce.

TFSA contribution limit 2021

It is the CRA that tends to determine the amount of the TFSA contribution limit that can be deposited annually into TFSA accounts. Even if not used, the limit accumulates over time.

The annual cap for 2021 is $6,000, while the cumulative cap is $75,500. What does this mean to you?

Let’s look at the TFSA account contribution limit over the years:

Years	Annual TFSA limit	Cumulative total
2009 – 2012	$5,000	$20,000
2013 – 2014	$5,500	$31,000
2015	$10,000	$41,000
2016 – 2017	$5,500	$52,000
2018	$5,500	$57,500
2019	$6,000	$63,500
2020	$6,000	$69,500
2021	$6,000	$75,500

If the TFSA amount was not withdrawn last year, then in 2020 the cumulative limit of $69,500 can be contributed less the amount already contributed.
If no TFSA exists, $69,500 of the total limit can be contributed this year.
Additionally, if the TFSA amount was already withdrawn last year, then a cumulative limit of $69,500 can be contributed this year, less the amount already contributed, less the amount withdrawn last year.

Several TFSA options are available to meet specific investor needs, including term deposits, savings accounts, stocks and bonds, and mutual funds.

TFSA or RRSP?

This is a question that many people ask themselves and which is also very important!

TFSAs (Tax-Free Savings Accounts) and RRSPs (Registered Retirement Savings Plans) offer many beneficial features to help people save for retirement or other savings goals.

Knowing the pros and cons of both can help you make the right decision.

Advantages of the TFSA

This tool allows you to invest in different products and benefit from full tax-free returns. Funds can also be withdrawn from the TFSA account whenever you want and this amount will not be added to income tax.
No fees are charged at the branch level when withdrawing funds from the financial institution. However, some accounts may incur fees, such as investment advisor accounts.
If you have the choice between higher income or income in the same bracket during retirement years, the TFSA is a better choice.
It can act similarly to an inheritance tool allowing the transfer of tax-free funds to family members and onwards.

Disadvantages of the TFSA

Benefits of the RRSP

An excellent retirement savings toolenabling investment and promoting growth.
Non-RRSP investments give rise to the payment of tax twice a year, on the initial income and on income from other investments. But by investing in an RRSP, you can benefit from tax relief on the amount invested and then on the amount remaining in the RRSP.
By the time a final withdrawal is made from the RRSP account, you will be in a lower tax income bracket and will be retired. Winnings are also protected.
Early withdrawal of money from an RRSP is permitted in two cases without incurring additional income tax. One of them concerns the purchase of the first house, where the withdrawal limit is $25,000 without tax or penalty and a repayment period of 15 years. To pay for post-secondary education, withdrawing from an RRSP requires a similar exception.

Disadvantages of the RRSP

The amount of the withdrawal constitutes taxable income at a higher rate, if made before retirement.
Withdrawing from an RRSP before retirement results in higher taxes. You also lose the benefits arising from the income sheltered in the RRSP in the event of early withdrawal. You also have to pay withdrawal fees.
RER rights are lost when funds are withdrawn and they can only be replaced if the withdrawal is intended for studies or the purchase of a house.

In short, TFSAs and RRSPs are excellent long-term investment tools.

The best Canadian TFSA savings accounts right now

Once the decision to invest in a TFSA has been made, the next step will be to research the best banks offering the best TFSA savings account.

Motive Financial Motive Savings Account: It offers competitive rates of 2.4% as well as free, unlimited transfers and withdrawals.
Alternative bank savings account: it offers an interest rate of 2.35% including free and unlimited debits and withdrawals. It has no monthly fees or minimum balance requirements. An account can be opened from anywhere in Canada.
Implicit financial TFSA: it offers an interest rate of 2.4% as well as monthly withdrawal and unlimited deposits.
Tangerine Tax-Free Savings Account: Rates offered to new clients are 3% for the first 182 days and 1.25% thereafter. For current customers, it is 1.25%. It offers unlimited free transfers, with no minimum balance maintenance or fees.
BMO Savings Account: For the TFSA account, the Bank of Montreal offers a promotional rate of 3.25%. But after 15^th In March 2020, the rate is expected to drop to 0.75%.
CIBC Tax Advantage Savings Account: New deposits benefit from a promotional rate of 3%. At the end of the promotional period, the offer is expected to drop to 1.15%.

Why choose the TFSA rather than the RRSP? The top 5 reasons

This is a great savings tool, even though its contribution limit has been cut by almost half. Here are some reasons to have a TFSA account:

Maximize your RRSP contribution room: The TFSA is an excellent choice if you want to reduce the amount of tax. If you are over 71, your RRSP contribution is limited.
If you turn 71 before December 31 of a year, then you must use the RRSP funds to purchase an annuity or withdraw the entire RRSP amount to convert it to a RRIF (Registered Retirement Income Fund). Contributing to the TFSA provides tax shelter.
Reduce taxes on investments made: Taxes must be paid on any interest income earned from a non-registered investment account or a GIC in a non-registered account. Investing $5,000 to generate annual interest of $100 will not incur taxes. Benefits can be derived from stock investments in the TFSA.
Being in a higher tax bracket after retirement: Even though you will be in the lowest tax bracket after retirement, some low-income citizens may benefit from higher income when they start receiving OAS (Old Age Security) and Canada Pension Plan benefits, including the GIS (Guaranteed Income Supplement). TFSA withdrawals will not reduce income-tested benefits.
Benefit from more contribution room each year: To benefit from RRSP contribution room, you must earn income. With higher income, it is possible to obtain more contribution room up to the annual maximum which, in 2016, was $25,730. Additional contribution room can be enjoyed with the TFSA, even in the absence of income. Additionally, a similar additional contribution amount can be used each year, like other citizens aged 18 and over.
Greater flexibility: Although not a typical savings account, the TFSA allows you to invest in GICs, bonds, stocks and mutual funds. It can also be used to build retirement savings, buy a home, or build an emergency fund, or all three.
When it comes to withdrawals, it is possible to withdraw any amount. There is no need to re-contribute the amount withdrawn. If you have maxed out your TFSA and want to contribute the available amount again, you must wait until the start of the following year to do so.

personal finance

Key features and investment rules for the TFSA contribution limit

Certain key features and investment rules govern TFSAs. Let’s take a quick look here:

Tax treatment: It is from after-tax income that contributions are paid. But account earnings and withdrawals do not attract tax.
Eligibility: Citizens over the age of 18 with a valid social insurance number provided by the government authority and a resident of the country are eligible for the TFSA. A non-resident can also open a TFSA account for income tax purposes with a valid SIN, but with a 1% monthly tax payable to ensure contributions remain in the account.
Annual contribution limit: As of 2019, it is $6,000 per year, up from last year’s limit of $5,500.
Overcontribution Penalty: If a contribution above the allowed limit is accidentally made to the account, this results in a tax penalty of 1% of the highest TFSA excess amount of the month for each month until the overcontribution position is reached.
Withdrawals: Funds can be withdrawn at any time. Amounts withdrawn in a given year can be added to contribution room the following year, regardless of whether the amounts withdrawn come from investment income or the initial contribution.
Carryover of contribution room: It is possible to carry forward and use all unused contribution amounts. If you have never contributed to the TFSA and in 2009, if you were 18 years old and over, then in the contribution room as in 2019 you will have an accumulation of $63,500.

Last words

That was my take on the TFSA account, its advantages and disadvantages as well as the contribution limit over the years, the RRSP, the advantages and disadvantages of the RRSP and the comparison of the TFSA and the RRSP in one go.

As I said before, the RRSP is the retirement savings vehicle for Canadians and you may be able to use it for a first home purchase, but it is not recommended.

When it comes to investing in TFSA, you can save tax on the dividends you earn and capital gains are tax-free. My recommendation is to max out your TFSA each year with the new limit you get. If you have not invested in the TFSA since 2009, you have a greater chance of investing more and more until you reach the maximum limit.

If you liked the content of this article and found it useful, share it on social media and help spread the word. Please also let me know your thoughts and comments below. That’s all for now.

Thanks for reading.