Finding ways to minimize what you owe when filing your taxes is one of the best-known tax tips out there. What if you could do so easily with a particular type of financial account? Canadians who are building their savings for a major purchase or preparing for retirement can potentially take advantage of TFSAs that allow them to earn interest or secure returns tax-free.
However, there are some limits with a TFSA. If you’re wondering, “What are TFSA maximum-to-date contributions?” or have a similar question, here’s what you need to know.
What Is a Tax-Free Savings Account?
A tax-free savings account (TFSA) is an investment account that can hold cash, mutual funds, bonds or ETFs. The money you place into the account has already been taxed, but a TFSA also allows any earnings to be tax-free. As a result, when you withdraw funds, there aren’t any new taxes to contend with, regardless of how much your balance grows.
How Do TFSAs Work?
A TFSA works like many other kinds of savings and investment accounts. You can transfer cash into it or use it for bonds, ETFs and mutual funds. Once they’re there, you can experience growth, capturing earnings or interest that increases your balance.
When you withdraw the money, you don’t have to worry about additional taxes. Funds you use on the assets in a TFSA were taxed previously, and earnings don’t trigger new taxes. This means you can make tax-free withdrawals from a TFSA.
How Much Can You Contribute to a TFSA?
As with many tax-advantaged accounts, there are contribution limits to TFSAs. The amount can vary from year to year, as the government has the ability to change the limits annually to account for shifting economic conditions.
In 2022, the TFSA limit is $6,000. That’s the same limit that was in place in 2019 through 2021. It isn’t clear what the 2023 limit will be, but news about it is likely forthcoming.
TFSA limits are indexed to inflation. With the inflation rate in Canada sitting fairly high — with figures like 8.1% in June and 7.6% in July of 2022 — there’s a solid chance an increase will occur. However, the amount won’t be known until the Canadian government formally announces it.
It’s also important to note that you may have contribution room beyond the annual limit, depending on your past TFSA activity. You can check it by logging into the CRA My Account website.
How to Withdraw From a TFSA
In most cases, you can make a withdrawal from your TFSA at any time. However, the type of asset may play a role in that. There are situations in which there are restrictions relating to lock-in rules.
Generally, the withdrawal process is simple. Simply follow the instructions you can find when logging into your account, and you can usually initiate the withdrawal in a few minutes. There’s also no withdrawal limit. You can essentially take as much out of the account as you’d like, barring funds related to withdrawal-restricted assets.
When you make a withdrawal, you don’t permanently lose contribution room. Instead, you can recontribute withdrawn amounts in the years that follow. Plus, the contribution room carries forward indefinitely. It’s also important to note that moving qualifying assets from one TFSA to another is not considered a withdrawal. Instead, this is merely a transfer.
