Following to our TFSA Contribution article, we are providing additional information on TFSA contribution limit. For an overview of the Tax Free Savings Account, we suggest you read our article about What is a Tax Free Account.
What is the TFSA Limit?
Each year the Federal government determine the TFSA contribution limit. This tax sheltered investment account was created in 2009 with a limit of $5,000. Each following year, the TFSA limit has been increase by the same amount. Therefore, the total limit is now set at $20,000 in 2012:
Total: $20,000 total contribution limit.
Please note that the $5,000 will be indexed following the inflation.
You Can Increase Your TFSA Limit
There is a way to increase your TFSA limit over time. In addition to the $5,000 per year, your TFSA limit is also growing through your TFSA withdrawals. Each time you make a TFSA withdrawal; this amount is reported and added to your TFSA limit of the following year. Therefore, if you withdraw $3,000 in 2012 from your TFSA account, your TFSA limit in 2013 will become $8,000. Until then, you are not really increasing your TFSA limit as it is only money you already had contributed that you are allowed to refund.
However, there is a real way where you can increase your TFSA limit. Imagine that you have invested $5,000 in 2009 in your TFSA. After 2009, you have not invested more money in your TFSA. In 2012, your contribution limit is set at $15,000 (2010, 2011 and 2012 contribution added). If you have made a good move with you first $5,000, your TFSA account might be showing $9,000 ($5,000 coming from your TFSA contribution + $4,000 in profit). You are allowed to withdraw all your investment from your TFSA (e.g. $9,000 in this case). If you do not make any contribution in 2012, your TFSA limit in 2013 will not be $25,000 (2009, 2010, 2011, 2012 and 2013 contribution added) but $29,000 (2010, 2011, 2012, 2013 + the amount of your withdrawal in 2012 ($9,000).
In fact, each time you withdraw from your TFSA, this amount is being added to your TFSA contribution the following year. The amount is not related to your contribution. Therefore, if you have made a bad investment and your $5,000 worth $2,000 and you need to withdraw it. Your contribution limit will be increased by $2,000 the following year even if you had contributed $5,000 in the first place.
TFSA Limit Calculation as Follow:
+ TFSA contribution for the current year (currently established at $5,000 per year)
+ Unused TFSA contribution from the previous years (with no limit on the number of years you can go back).
+ TFSA withdrawals in the previous year
This calculation is made by the government and your TFSA limit is being sent to you at the same time you receive you notice of assessment (after filling your tax report in April).