CRA has recently set a new contribution limit of $10,000 but the new measure is still awaiting parliamentary approval. The limit applies to tax-free savings accounts, and Canadians are free to take advantage of it without facing any penalties. The limit was raised from $5,000 to $10,000 and will be effective as of January, 2015. While finance experts point out that it is a good idea to wait until the budget was passed, some Canadians have already made contributions to their TFSA accounts.
Benefits for Users
The new increased limit means that Canadians can contribute more to their TFSA accounts without being penalized for this. This is good news for account holders for a number of reasons, one being that TFSAs allow Canadians to save more money in a tax-sheltered way, be it for college education, a mortgage or car down payment, vacations or holidays, or toward retirement. In general, the goal is to encourage consumers to save more toward mid-term and long-term goals. The new limit also gives Canadians more options, whether a RRSP, TFSA, or another savings solution. A tax-free savings account is a good choice for Canadians who expect to be in a high tax bracket when they reach retirement. The higher limit means that consumers are allowed to save more toward retirement, and those with higher income levels are free to direct a larger portion. Those who are just starting to save early in their careers also benefit from opening a tax-free savings account. The reason is that no taxes are paid on investment yields. This means that you are likely to fall in a high tax bracket once you retire. But the good news is that the tax deduction will be smaller compared to what you will pay should you decide to make withdrawals. Of course, if you have loans and other balances to repay, this is always an option. High interest rates on revolving credit, for example, translate into high charges that accumulate over time. If you don’t have large outstanding balances with excessive fees and interest charges, however, it makes sense to save more cash toward retirement. This is especially important in light of the fact that more and more Canadians are expected to work after the age of 66.
The Prime Minister stated that higher limits on TFSAs won’t be an expensive problem for future generations to solve. Criticism comes from financial experts and opposition politicians who warn that the higher limits will pose major revenue problems over the long term. Some analysts point to the fact that by 2080, limit hikes may have a negative financial impact on the provincial and federal governments. Proponents, on the other hand, highlight the fact that the higher limit encourages people to save more which is good for the economy. Besides, a tax-free savings account is a more flexible option than a registered retirement savings plan and can be used to save toward the purchase of a home.