Over the weekend, the Canada Revenue Agency officially released the TFSA (Tax-Free Savings Account) contribution limit for 2021 which is $6,000. This means the contribution room for the TFSA in 2021 is similar to the last two years.
What’s the cumulative TFSA contribution limit in 2021?
According to the Canada Revenue Agency, the annual TFSA contribution limit each year is indexed to inflation and then rounded off to the nearest $500. The CRA said the inflation indexation increase for 2021 is 1%.
Further, the cumulative TFSA contribution room stands at $75,500 if the eligible person has never contributed to this registered account since its inception back in 2009. Canadians who have withdrawn any amount from the TFSA will have to factor in their gains and losses before they contribute to this account next year.
The TFSA contribution limit is determined by adding your dollar limit for the current year with the withdrawals made in the previous years and any unused contribution room in the previous years.
The TFSA was introduced in 2009
The Canadian government launched the TFSA program at the turn of the last decade to encourage savings among residents. While contributions to the TFSA are not tax-deductible, any withdrawals in the form of dividends, capital gains, or interests are totally exempt from CRA taxes.
According to industry experts, this registered account is an ideal vehicle for young Canadians who have just begun to work and expect to be in a higher income tax bracket in the upcoming years.
So, if a TFSA holder is subject to a higher tax rate after a few years, they can realize a benefit by accessing tax-free income from this account instead of having to withdraw investments from taxable accounts such as an RRSP.
The TFSA is extremely flexible and you can make a withdrawal any time you want. It can be to meet emergency expenses, to make a down-payment for your home, or even to fund a vacation.
What were the historical contribution limits for this account?
In order to be eligible to make a TFSA contribution, you need to be over the age of 18 with a valid social insurance number. The contribution limit for residents in each of 2009, 2010, 2011, and 2012 was $5,000. It was increased to $5,500 in 2013 and 2014 while it was increased further to $10,000 in 2015.
The TFSA contribution limit was revised lower to $5,500 in 2016, 2017, and 2018 after it was increased to the current limit of $6,000 in subsequent years.