TFSAs and RRSPs What Investors need to know

Tax Free Savings Accounts – Fast Facts 

Contributions into a TFSA are not tax deductible; however, any income accumulated in a TFSA, whether in the form of dividends, interest, or capital gains is not taxed within the account or upon withdrawal. 

Who is eligible to open a TFSA?

Any Canadian resident over the age of 18 with a valid social insurance number can open a TFSA. Once an individual reaches the age of 18, he or she may contribute up to the full annual dollar amount permitted in that calendar year. A person does not need to have earned income during the calendar year in order to contribute to their TFSA. 

How much can you contribute?

TFSA contribution room is the same for everyone regardless of income level. Contribution room is restricted per calendar year and is as follows:

• 2016 – $5,500, or cumulative total of $46,500
• 2017 - $5,500, or cumulative total of $52,000
• 2018 - $5,500, or cumulative total of $57,500
• 2019 - $6,000, or cumulative total of $63,500
• 2020 - $6,000, or cumulative total of $69,500

*Cumulative total: If you have never contributed to your TFSA and choose to do so in 2020, you may contribute up to $69,500 to your account.

What happens if you over-contribute to your TFSA?

In the instance of over-contribution, TFSA owners will be subject to a 1% per month tax on the amount in excess of their contribution room for however long the account remains in excess.

Example: In March of 2016, Tanya contributed $4,000 to her TFSA. In June of that same year, she contributed $2,600 to her account. Given that the TFSA contribution limit for 2016 was $5,500 and she had no extra cumulative room, Tanya’s account is over the limit to an excess of $1,100. She holds the money in her account until September at which point she withdraws $1,100 from her account.

The taxes owing as a result of Tanya’s over-contribution would be calculated as follows:

$1,100 x 1% tax x 3 months = $33 in tax

Registered Retirement Savings Plans – Fast Facts

A Registered Retirement Savings Plan (RRSP) lets individuals save for retirement while sheltering contributions from tax. As long as the funds accumulated remain in the account, they are sheltered from tax. Individuals can contribute to their RRSPs until the age of 71.

What is your RRSP deduction limit?

Your deduction limit or contribution room is based on your earned income from the previous year. Earned income is calculated by adding employment earnings and other income and subtracting specific employment expenses and losses. The amount can be found on your T1028 form.

Spousal and common-law partner RRSPs

Spouses and common-law partners can elect to open a spousal RRSP that they can both contribute to. Keep in mind that any contributions made to a spousal RRSP reduces your contribution limit for other accounts. You can still contribute to your spousal RRSP until the end of the year that he or she turns 71 years of age.

What happens when you turn 71?

Once a plan owner turns 71 years old, he or she has three options:

• Withdraw the funds: Taxable on withdrawal
• Convert the funds in his or her RRSP to a RRIF:Registered Retirement Income Funds (RRIFs) pay an annual minimum amount for the duration of the plan holder’s life. 
• Use the funds to purchase an annuity.

How to leverage your savings 

The Home Buyers’ Plan lets you take advantage of the funds set aside in your RRSP by letting first time home buyers withdraw up to $35,000 tax free towards the purchase or construction of their first house. 

Repayment: Under the HBP, individuals typically have 15 years to repay the amounts withdrawn from their RRSP’s. This period begins the second year after the funds were withdrawn. Learn more here.

Additionally, the Lifelong Learning Plan (LLP) enables RRSP account holders to withdraw amounts from their account to finance personal or spousal full-time education or training courses. The maximum amount permitted for withdrawal is $10,000 in a calendar year and $20,000 in total so long as the student is enrolled in a qualifying institution. However, it cannot be used to fund a child’s education. 

Repayment: When it comes to the repayment of funds under the Lifelong Learning Plan, individuals who withdraw funds under the LLP must repay 1/10 of the total withdrawal amount each year, having paid the entire amount back in ten years. Learn more about LLP repayments here.

What happens if you over-contribute to your RRSP?

Similarly to TFSAs, over-contribution to your RRSP account will result in a 1% per month tax penalty on the excess funds contributed.

Please give me a call to discuss how we can enhance the investment potential of your TFSA and RRSP.

Best regards,