A new year is right around the corner. In a few short days, we will usher in 2021 and 2020 will be in the history books! Can I get an “Amen”?
I don’t know many who would argue that this year has not been trying for the vast majority of us, and on so many fronts. The one good thing to come out of this year is the announcement that the Tax Free Savings Account contribution limit for 2021 is going to be $6,000.
That’s right – it’s TFSA time again! Hooray!
If you’re one to make New Year’s resolutions, you should definitely put one or two money-related items on that list. Toward that end, consider adding some money to your TFSA. This is a financial tool worthy of your time and attention. If you have a TFSA, any money sheltered therein is allowed to grow tax-free. This is a tremendous benefit that should not be squandered!
I’ve said this before so please indulge me as I repeat myself… I do so wish this tax-shelter had been properly named the Tax Free Investment Account. Contrary to its egregiously-mislead moniker, this particular financial tool is not limited to savings accounts. Yes, if you absolutely must, you can have a savings account in your TFSA. There’s nothing preventing you from pursuing that option.
Consider the following… a savings account is not the best use of the tax-free feature of this tool. An investment account is a far more beneficial way to use the tax-free feature of the TFSA. At the time of this post, savings account pay less than 1%. A so-called “high interest savings account” pays less than 2%.
Does 2% sounds like a “high” interest rate to you?
Here’s another question for you. Would you rather earn less than 1% without paying taxes or earn 7% without paying taxes?
It’s not a trick question… You’re not an idiot. You’d rather earn 7% without paying taxes. How do you do that? Simple, not easy. You consistently contribute money to an investment account held in your TFSA where your money is invested in a low-cost equity index fund over a long period of time. On average, the stock market has averaged a return of 7% or better. This means that some years, the stock market’s return will be less than 7% and in some years, its return will be higher than 7%. Over the long-term, the average return will be 7%.
Without taxes to cannibalize your returns, an investment account held in a TFSA can grow to a very nice size over a very long period of time.
Again, for the cheap seats in the back, savings accounts are currently paying less than inflation. In other words, inflation is eroding the purchasing power of your money faster than you’re earning interest. Take a look at your financial situation. If you’re only early a pittance in interest each month in your savings account, yet your grocery bill is going up by $20 each time you re-stock your pantry, then you’re hooped. Your savings account money is not working for you – it is losing value every single day! A savings account is not where you want to keep your money if you’re looking for it to be invested for long-term growth. Savings accounts are best used as short-term sinking funds. For example, a savings account is a great place to hold your money while you’re saving up for a vacation, a family celebration, or a major renovation.
Your tax-free (TFSA) and tax-deferred (RRSP) money shelters are for the money that’s meant to grow faster than the rate of inflation. Do not waste the very precious room in these shelters by keeping your money in a savings account. The ability to grow your month without paying taxes is a financial super-power. Use that power to the best of your ability by investing your money for long-term, tax-free growth.
Contribute as much as you can!
The TFSA was first introduced in 2009. Since then, the following annual contribution limits have been in place. Whatever contribution room is not used in one year is carried over to the next year.
| For 2009, 2010, 2011, and 2012 | $5,000 |
| For 2013 and 2014 | $5,500 |
| For 2015 | $10,000 |
| For 2016, 2017, and 2018 | $5,500 |
| For 2019, 2020, and 2021 | $6,000 |
| Lifetime Total Contribution on January 1, 2021 | $75,500 |
Roughly six weeks before the end of each year, the Canadian government tells people how much money can be contributed to their TFSA. In 2021, people aged 18 and over will be permitted to contribute $6,000 to this magnificent tax shelter. This latest contribution amount is in addition to any contribution room that you have carried over from prior years.
Carry-over room is not something to strive for, since you want your investments to start working for you as soon as possible. The reality is that it’s not always possible to max out your contribution ever year. Fair enough. Contribute as much as you can, as soon as you can.
The quick and dirty of contributions for 2021 are as follows:
- If you’ve never made a contribution to your TFSA, then your lifetime contribution room on January 1, 2021 will be $75,500.
- If you’ve already contributed $X to your over the years TFSA, then you’ll have $75,500 minus $X worth of contribution room.
- And should you be in the very fortunate position of having made full contributions to your TFSA over the years, then you will have $6,000 of contribution room when 2021 finally arrives.
Stay healthy. Wear a mask. Wash your hands. Socially distance if it’s essential for you to be out and about. And invest as much of your hard-earned money as you possibly can for long-term, tax-free growth inside your TFSA.
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Weekly Tip: Pay off your mortgage before you retire. It’s never wise to give up a paycheque while you have debt. For many people, retirement means living on a fixed income. As such, that fixed income should not be paying for debt payment. Make a plan and pay off your mortgage before you retire.