The TSFA contribution limit and how it works

If you keep scratching your head at the idea of TSFA, then look no further. TSFA account are becoming increasingly popular — and for good reason. That’s why below, you’ll find everything you need to know about TSFAs and why having one is a good idea.

What is a TSFA?

TSFA stands for “Tax Free Savings Account”. Just like the name suggests, they were introduced back in 2008 in order to help people meet their savings goals throughout their lifetime. The great thing about TSFAs is that you can watch your money grow by earning interest or returns, and all of those earning are tax-free. You’re also able to withdraw money whenever you would like — these withdrawals are also tax-free. You’ll therefore be watching your money grow faster than a regular savings account. This may all sounds pretty familiar, because there is another way the government of Canada allows you to save more money: RRSPs.

How is it different from an RRSP

Although TSFAs and RRSPs (Registered Retirement Savings Plans) sound like they’re pretty much the same, there are some key differences.

Retirement vs. general savings


When people put money towards their RRSPs, they do so with the intention of saving money for retirement. In the case of TSFAs, however, people typically use them to save for any purpose — long-term or short-term.

Withdrawals

Because RRSPs are used in order to save for retirement, withdrawals typically aren’t likely to occur. That’s why withdrawals are usually taxable with RRSPs. Because TSFAs are used for short-term or long-term savings, withdrawals are more likely to happen, so they’re totally tax-free.

Tax-deductible contributions



RRSP contributions are tax-deductible, so you may end up paying less taxes on your personal income in the long run. TSFA contributions are not tax-deductible.

Contributions



The manner in which contribution limits are calculated differ. With TSFAs, the amount is set on a yearly basis. Any unused amount is carried over from previous years. However, with RRSPs, the contribution limit is 18% of the income reported on your previous tax return for a maximum of $27, 830 (depending on the year). Any unused amount is also carried over from previous years.

Age limit



As long as you have a job, you can start contributing to your RRSP, whereas you have to be of the age of majority to start contributing to a TSFA. However, you can no longer make contributions to an RRSP after the age of 71, whereas you can keep contributing to a TSFA until you want to stop.

How do TSFA contributions work?

As mentioned above, TSFA contribution limits are calculated year to year and don’t differ from person to person. Any unused contributions can also be carried over from previous years. Therefore, if you haven’t started contributing to a TSFA, your contribution limit will include the contribution limits from 2009 onwards. To give you an idea of what that looks like, consider the following table.

Keep in mind that if you are not a resident of Canada for any of those given years, then you cannot contribute to a TSFA for those years. If you already have money if your TSFA, then it will not accumulate for the period of time in which you are not a resident of Canada.

Although it is a tax-free savings account, the CRA (Canada Revenue Agency) will impose a 1% tax on the over-contribution amount for the months in which you have surpassed the limit — until the over-contribution is withdrawn.

If you’ve been having trouble with saving money and are discouraged by the fact that you never see that money grow, then a tax-free savings account is right for you. However, if you want to open a tax-free savings account, but are having trouble making ends meet, then consult this online budgeting tool as soon as you can. Allevia is made to find the perfect solution for your personal situation, even if that just means reorganizing your budget! The sooner you are able to get back on track, the sooner you’ll feel secure in your future — and Allevia will help you get there.