Ottawa is raising the tax-free savings account (TFSA) contribution limit by $7,000, bringing the total contribution cap for anyone born before 1991 to $102,000.
Driving the news: It matches the second-largest contribution hike that the feds have made since introducing the program in 2009. The yearly contribution limit, which grows based on inflation, is the same for everyone, but total individual contribution limits depend on age.
Why it matters: The TFSA has become one of the most important tools for Canadians to build wealth, in both the short term and the long term. In 2020, Canadian families’ participation rate in TFSAs reached a record of 39.4%, nearly double the rate from 2009.
- Because there are no penalties for withdrawing money, the TFSA offers the flexibility to use it for everything from investing in stocks to saving for a new car.
- TFSA contributions have also been on the rise, increasing by 75.0% between 2009 and 2020. That’s compared to increases of 27.1%, and 21.1% for Registered Pension Plans and Registered Retirement Savings Plans (RRSPs), respectively.
Yes, but: As people contribute more to their TFSAs, RRSP contributions are on the decline. Some financial planners say that’s a worrying trend because the accounts are often most effective in tandem, especially when it comes to retirement planning.—LA