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Financial-Planning-Made-Easy

Unravelling TFSA re-contribution rules

Since their introduction by the federal government in 2009, Tax-Free Savings Accounts (TFSAs) have become a favorite savings option for many Canadians – and with good reason: TFSAs provide tax-free savings growth and easy, tax-free withdrawals at any time for any purpose. Almost anyone can benefit from a TFSA – but if you have one, be careful because there is one not-well-understood re-contribution rule that could cost you an unexpected tax hit. That mistake: Making a withdrawal from your TFSA and replacing the money too early.

Let’s take a closer look at TFSAs and how to avoid tax penalties.

  • TFSA investments are not tax deductible but they do grow on a tax-free basis.
  • The annual TFSA dollar limit is indexed to inflation in $500 increments and for 2014 the limit is $5,500.
  • If you don’t use your maximum contribution room every year, it accumulates year after year, so you can use it any time you choose.

The maximum amount you can contribute to your TFSA is limited by your TFSA contribution room, which is calculated this way:

  1. The annual dollar limit (currently) $5,500.
  2. Plus the amount of withdrawals from a previous year (excluding withdrawals of excess contributions, qualifying transfers, or other specified contributions).
  3. Plus any unused contribution room from previous years.

If you make a withdrawal, the earliest you can ‘earn back’ your TFSA contribution room is the first day of the next year after the TFSA withdrawal was made. And this is where many TFSA-holders are running into unexpected taxes: At any time of the year, if you contribute more than your allowable TFSA contribution room, you will be considered to have over-contributed to your TFSA and you will be subject to a tax equal to 1% of the highest excess TFSA in the month, for each month you are in an excess contribution position*.

Here’s an example:

You have maximized your TFSA contribution room for 2014, but decide to withdraw $4,000 for Christmas shopping. Assuming that you have no additional contribution room from previous years, if you were to re-contribute this $4,000 before the end of 2014, you would be considered to have over-contributed and would incur tax penalties. However, if you wait until January 1, 2015, you would have ‘re-earned’ the $4,000 contribution room and could contribute up to that amount in your TFSA without penalty.

When you know the ‘rules’ and follow them, there are many ways a TFSA could work for you. Your professional advisor can help you get the most from your TFSA and every other element in your overall financial plan.

*Canada Revenue Agency, cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/cntrbtn-eng.html

 

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.



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About the Author

As a Regional Director at Investors Group it is my mission to grow the Okanagan Region of Investors Group. I help recruit, train and develop Consultants at Investors Group. I am always looking for professionals that would like to be their own boss and enjoy the training, support, rewards and compensation for being a successful Consultant. Also ensuring that we continue to be involved in the community in which we live.

As a Financial Consultant it is my passion to serve clients by giving them full financial planning advice. This includes investments, insurance, retirement & estate planning and tax reduction strategies.

Connect with me on LinkedIn: http://www.linkedin.com/pub/karen-erickson/15/391/1b6

Click here to visit my website.

Contact Karen by email at:  [email protected]

 



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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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