Whew! The first three months of 2019 are already in the rearview mirror. Tempus fugit! Am I right or am I right?
A few weeks back, I was happy to report that the Tax Free Savings Account (TFSA) contribution limit was raised to $6,000 for 2019. If you’ve been maxing out your TFSA contribution, then this means that you’ll have to find an extra $600 in 2019 if you want to make the full contribution. At the time of publishing this post, the cumulative contribution room for your TFSA was $63,500.
| Year | Contribution | Cumulative Contribution Room |
| 2009 | $5,000.00 | $5,000.00 |
| 2010 | $5,000.00 | $10,000.00 |
| 2011 | $5,000.00 | $15,000.00 |
| 2012 | $5,000.00 | $20,000.00 |
| 2013 | $5,500.00 | $25,500.00 |
| 2014 | $5,500.00 | $31,000.00 |
| 2015 | $10,000.00 | $41,000.00 |
| 2016 | $5,500.00 | $46,500.00 |
| 2017 | $5,500.00 | $52,000.00 |
| 2018 | $5,500.00 | $57,500.00 |
| 2019 | $6,000.00 | $63,500.00 |
However, maybe you’re not so fortunate as to be able to make a full contribution this year. Maybe you’re still tackling some debt, or maybe you have other priorities at this time. For reasons known only to you, maxing out the TFSA in 2019 is not on your agenda.
Be that as it may, you should still know the contribution limits. Once your debt is gone and/or your other priorities are met, you’ll have more disposable income. The question then becomes…
Whatever should you do with that extra money?
The Ad Man & the Creditor will encourage you to buy. Buy something – buy anything! They don’t care what you purchase; their sole goal is simply to ensure that your money leaves your pockets as fast as possible and that it winds up in theirs. This is not a good thing!
I’ve talked about possible uses for TFSA money in another post. Today, I’m going to suggest that you keep your money by contributing it to your TFSA. And I’m also going to suggest that, once it’s in there, you should invest it so that it can grow tax-free. I’ll even be so bold as to say that the TFSA is a gift that keeps on giving. If you’re patient enough to invest for the long-term, the TFSA will bolster your other retirement income by creating a stream of money that you can access tax-free.
I’m not a tyrant. I know that after you’ve paid off your debt, you’re going to want to reward yourself for being so diligent and focused. I’m even willing to accept that part of your former debt payment should go towards increasing your standard of living. My suggestion to you is to have 75% of your former debt payment be directed towards your financial goals and use the remaining 25% of that former payment to increase your lifestyle.
Every little bit helps!
Even if you can’t max out your TFSA contributions right now, you should contribute whatever you can so it can grow tax free for as long as possible! As you can easily imagine, taxes are a drag on any investment’s growth. If you have to give 25% to 35% of your investment return to CRA as taxes, then that portion of your money is no longer growing in your pocket. Whenever possible, you should invest within your TFSA so that all of your money is working for you. This is the heart of tax-free investing – you don’t have to send slices of your money to the CRA through taxes. Take advantage of this investing super-power as soon as you can!
And please don’t be mislead by the word “savings” in the moniker. Your TFSA need not be limited to a savings account. You can open a TFSA at any online brokerage and you’re free to hold stocks, bonds, mutual funds, exchange-traded funds, or other investments inside your TFSA. (As an aside, if you’re going to hold US-dollar investments in your TFSA, get professional tax advice. The tax treaty between Canada and the United States doesn’t protect US-dollar investments from being taxed by Uncle Sam.)
Blue Lobster, how do you use your TFSA?
As you know, my personal preference is dividend-paying exchange-traded funds (ETFs). I hold these in my TFSA and I allow the dividends to be reinvested every month. When I retire, I’ll be in a position to withdraw several hundred dollars from my TFSA each month without paying taxes! My TFSA holds many ETF units, each of which pays me a dividend every month. By the time I retire, I’ll have many more such units which means I’ll be receiving many more dividends. And since I’ll have the option of withdrawing them from my TFSA, I won’t have to pay a penny of taxes on my divided income.
Yes, that’s right. Not only will my investments grow tax-free while inside my TFSA, they can be withdrawn from my TFSA without paying taxes on that withdrawal. How sweet it is!
One of my financial fantasies is for my TFSA to grow so large that my monthly dividend withdrawals are sufficient to fund my retirement lifestyle. If I could do that, then I’d never have to pay taxes on that money while maintaining my desired lifestyle! Can you imagine how great that would be?
However, magical thinking won’t assist me to accomplish my goals. Realistically speaking, it is far more likely that my TFSA will supplement my other retirement income streams. That’s a good thing too. Should I be so fortunate as to not need the money from my TFSA, then I’ll just let the dividends continue to compound. After all, I’m not going to waste my dividends by spending them on things that I don’t really want simply because I have them to spend.
The TFSA is one of the very few ways for your money to grow to tax-free. Take advantage of the TFSA as soon as you possibly can! Do what you can to make some kind of contribution to your TFSA. Invest that money wisely then stand back and let your investments compound over time. You will need money tomorrow, so start saving it today.