TFSA Contribution Limit - Millionaire on the Prairie

Yay!!! It’s TFSA time again!

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.

Doing First Things First

Go ahead, Gentle Reader – you’re on the air.

Blue Lobster, I’ve got a question for you… I’ve saved up some money. Where do I invest it for long-term future growth?

Great question! And one that I’d love to answer… but first things first. I have to state the following:

I am not a financial advisor nor am I in any way certified or qualified to give tax advice. The following post is based solely on my life’s experiences. I can tell you what I did, but I’ve made mistakes over the years. My choices were based on my particular circumstances which means that my choices might not be right for you. If you want professional advice, then I’m going to strongly recommend that you find a professional person to give it to you. I’m not a professional financial advisor so you rely on my opinion at your own risk.

Now, with that out of the way, let’s get back to your question. I like to call the following my Order of Investing Money.

First Things First

In my opinion, the best place to first put your money is into a Tax Free Savings Account (TFSA). The TFSA was created in 2009. If you’ve never contributed any money to your TFSA, then your cumulative contribution room as of January 1, 2020 is $69,500.

The TFSA does not generate a tax deduction. The money that goes into the TFSA is after-tax money. Whether you’re in the highest tax bracket or the lowest tax bracket, your money goes into the TFSA after you’ve paid taxes on it. If you invest it in equity products and you earn outsized returns, then all of the initial contribution and the growth generated can be withdrawn without any kind of tax penalty.

Allow me to be repetitive so that the following point is not lost on anyone reading this post. All money that goes into a TFSA grows tax-free. When you take it out of the TFSA, the money is not taxed by the government.

Whatever you take out of your TFSA can be contributed back into your TFSA in the following calendar year. This rule is applicable even if your withdrawn amount is higher than the amount that you’ve contributed over the years. In other words, you can withdraw both your initial contributions and the growth that has accrued, then you can contribute those amounts back to your TFSA the following calendar year.

So if you’ve invested the maximum to your TFSA, i.e. $65,000, and it’s grown to $110,000, then you can withdraw the full $110,000 whenever you want. You simply can’t put any of that money back into your TFSA until January 1, 2021.

Should I put my money anywhere else?

The next best place to save your money, in my humble opinion, is in your Registered Retirement Savings Plan (RRSP). However, there are a few major differences between the RRSP and the TFSA that you need to know about.

Unlike the TFSA, money inside your RRSP will grow on a tax-deferred basis for as long as it stays inside the RRSP. The taxes that are owed on the money that accumulates in your RRPS are deferred. You don’t pay those taxes now – instead, you will pay those taxes later. To be precise, you will pay taxes on that money when you withdraw it from your RRSP.

Contributions to your RRSP are tax-deductible. If you put money into your RRSP, then the Canada Revenue Agency will refund you the taxes that you paid on that money when you earned it. This is great!

If you’re in a high tax bracket when you contribute to your RRSP and in a lower tax bracket when you withdraw from your RRSP, then you’ll save money on taxes when you withdraw it.

If you’re in a low tax bracket at contribution and then a higher tax bracket at withdrawal, then you’ll pay more in taxes. This sounds bad but keep in mind that you’ll have had years of tax-deferred growth within your RRSP if you’ve seen good returns on your investments.

Paying taxes on money is far, far better than having nothing set aside for retirement.

And if I’ve maxed out my TFSA and my RRSP?

Gentle Reader, you’ve done me proud! If you’re in the very fortunate position of having maxed out both your TFSA and your RRSP, then I salute you. Reach over and give yourself a pat on the bat. You’ve done well!

Your next step is to open a brokerage account, aka: an investment account, and start investing your money. You’ll be contributing after tax dollars to this account. Your growth will be taxed as you earn it, but you’ll be investing your money instead of squandering it on frivolities that don’t add to your life.

Throughout this entire order of investment priorities, you should be taking care of your present and future financial needs by practicing the 4-step process for financing your dream life: save-invest-learn-repeat.

You’re going to have to take some time to learn about TFSAs, RRSPs, brokerage accounts, and the various investment options available to you.

Do not let analysis-paralysis stop you from starting. Similarly, it mustn’t prevent you from making investment decisions. You won’t make perfect decisions, but console yourself with the truth that no one does. This is why learning is such an integral part of the 4-step process.

Maxing out my accounts is impossible!

Stop fretting! No one said you have to max out all your accounts.

If you can, then great.

If you can’t max out all your accounts in one shot, then contribute as much as your budget will allow and get on with the rest of your life. The only “bad” contribution amount is $0. Anything over and above $0 is progress. Find ways to cut expenses or find ways to increase your income. The option is yours, but so is your obligation to yourself to contribute as much as you can towards the Care & Feeding of Future You.

As you learn more, you’ll earn more. And when you earn more, you’ll contribute more. It’s that simple.

Please do keep in mind that simple isn’t the same as easy. I’ve yet to find that “easy” way to earn money to contribute towards my investments. Every dollar has been hard-earned.

My advice is to start with first things first. Begin by fully funding your TFSA. Once you’ve done that, max out your RRSP. When that task is done, set up an automatic transfer to fund your brokerage account. And if you decide to not follow this Order of Investing Money, then I beseech you to continue learning about money so that you’re confidently investing for your future in a whatever manner that best suits you.

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Weekly Tip: Open an online savings account. Get one that pays higher interest than what the brick-and-mortar banks are offering. Consider EQ Bank. (I’m not being paid for mentioning this bank.) This savings account should be separate from your daily chequeing account. Set up an automatic transfer of money from your paycheque to your online savings account. This transfer should fund – in order of priorities – your emergency fund, annual bills, short-term goals, and luxuries for yourself.

Retirement is a Function of Money, not Age

I’ve been reading many articles about how people in their 60s, 70s and even in their 80s are still working because they can’t afford to retire.

Invariably, the statement is made that the government pension is not enough to retire on and to have a comfortable life.

For the record, I want it known that I believe retirement is a function of money and not a function of age. Once employers transferred the obligation of saving for retirement into workers, it became necessary for workers to realize that retirement wasn’t guaranteed with the passage of a particular birthday.

In order to maximize your chances of retiring comfortably when you want to, you must do the following things.

First, live below your means so that you can fully fund all of your registered accounts. These would be the Tax Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) in Canada. You can contribute up to $26,500 to your RRSP for the 2019 tax year. As for the TFSA, the 2019 contribution limit is $6,000. These might be huge amounts for you, or they might be pocket change. Either way, contribute as much as you can as soon as you can. I promise you that you will need money in your dotage. These two accounts allow you to set aside money and to have that money grow without being taxed. Tax-free growth is awesome!

Second, continue to live below your means so that you can invest in you non-registered investment accounts. If you’ve got the money after fully funding your registered accounts, then don’t blow it on things that don’t bring you joy. Instead, put some of it away for your future. Non-registered investment accounts are also called brokerage accounts. Some people say to save 15% of your income. I advocate for saving until it hurts. The more you save, the longer your money has to compound and grow.

Third, stay out of debt to the greatest extent possible. Debt is a financial cancer. It puts a claim in your future income. Debt stops you from investing your money towards your own goals. Think about your debt as a claim on your time. More debt means staying in the workforce longer in order to pay off your creditors. Do what you have to do to eliminate debt from your life to the greatest extent possible. Make sure that debt doesn’t accompany you into retirement!

Fourth, get rid of your TV. The entire purpose of commercials is to get you to buy stuff. Every ad is designed to make you believe your life would be better if you opened your wallet. This is not true. Stop exposing yourself to so many damn ads! Bury your nose in a book. Go for a walk. Find a volunteer activity. A new year is about to start. Consider a resolution to eliminate television from your life, whether it be cable, Netflix, Crave, Hulu, whatever. Maybe the idea of going cold turkey on TV makes your heart race? Could you pick one day of the week to give up the consumption of commercials? Even seeing 1/7th fewer exhortations to spend will give your wallet some relief.

The size of your retirement kitty is dependent on how soon you plant and water your money tree. Save-invest-learn-repeat. Unless you’re living on 30% of your income, it’s going to take a good long time to save up a decent-sized retirement kitty. Start saving today!

You’re the one with the power to invest your money for long-term growth. You have the ability to learn about various options for your money. It’s on Today You to prepare as best you can for the arrival of Tomorrow You. Save yourself from the struggle of living on a government pension. The maximum pension payment in Canada today is less than $1200 per month. And you’re only entitled to that if you’ve worked for 40 years!!!

Even if you’re one of the fortunate ones who love their job situation, you must still think about having enough money to retire in your own terms. Ask yourself if you’d still love your job if certain conditions changes. A new boss? A longer commute? Fewer resources to do more work? A change in duties? Do you want to have the option to leave the world of work without financial worries if the job you love were to morph into one you despised?

Retirement is a function of money, not age. When you have enough money, you can retire whenever you want. Try to think about this every time you go to spend. Is your intended purchase worth another day at work?

Tax Free Savings Account – the Gift that Keeps on Giving

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.