# No surprise but TFSA annual contribution limit increased by $500 to $5,500



## DavidJD (Sep 27, 2009)

_"Minister of State for Finance Ted Menzies is expected to confirm Monday that the built-in indexation for TFSAs will kick in for the first time in 2013, taking the maximum contribution to $5,500."_


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## HaroldCrump (Jun 10, 2009)

Yep, heard it on the news this morning.
I posted about it on the Losses in TFSA thread, where this was being discussed, lest the thread police came and got me. ;o)


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## webber22 (Mar 6, 2011)

It's official

http://www.fin.gc.ca/n12/12-151-eng.asp


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## the-royal-mail (Dec 11, 2009)

This is great news, thanks for the official confirmation!

I better watch my spending these next few weeks as I am anxious to make the full deposit and will have to dig up $500 extra dollars to be ready as soon as the new TFSA year arrives. *HNY!*


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## Jungle (Feb 17, 2010)

Good to know, thanks for posting.


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## Young&Ambitious (Aug 11, 2010)

Woohoo. It only makes sense...taxes have gone up, so let the TFSA rise too


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## Ethan (Aug 8, 2010)

I love the TFSA. For every year other than 2009, I've transferred in the maximum annual contribution on the first trading day of the calendar year, and 2013 will be no different.


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## jamesbe (May 8, 2010)

Awesome! Good to know, now to find the $11k for the family


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## Sherlock (Apr 18, 2010)

Can't wait till 2016 when they raise it to 10k/yr!


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## steve41 (Apr 18, 2009)

I hate to rain your parade, but if they took the TFSA cap away completely.... guess what? the RRSP would still outperform the TFSA..... OUTPERFORM!


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## webber22 (Mar 6, 2011)

That means that you can make your 2013 TFSA stock purchase on December 27th for settlement in 2013, January 2nd


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## Sherlock (Apr 18, 2010)

steve41 said:


> I hate to rain your parade, but if they took the TFSA cap away completely.... guess what? the RRSP would still outperform the TFSA..... OUTPERFORM!


Explanation please!


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## GoldStone (Mar 6, 2011)

steve41 said:


> I hate to rain your parade, but if they took the TFSA cap away completely.... guess what? the RRSP would still outperform the TFSA..... OUTPERFORM!


The RRSP outperforms under the assumption that individual's tax rate drops after retirement. If you take away that assumption... the performance is exactly the same.


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## jamesbe (May 8, 2010)

But what if your RRSP limit is also maxed? 

I welcome any way the gov offers me to reduce tax.


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## GoldStone (Mar 6, 2011)

Sherlock said:


> Explanation please!


Let's assume that the person in this example pays 43% marginal tax rate.

Scenario 1:

Invest $1000 of pre-tax dollars in the RRSP.
10% annual return.
Balance after one year: $1000 * 1.1 = $1100
Withdraw the money and pay 43% tax.
You end up with: $1100 * (1 - 0.43) = $627

Scenario 2:

Take $1000 as income instead of making RRSP contribution.
After-tax income: $1000 * (1 - 0.43) = $570
Put $570 in the TFSA.
10% annual return.
Balance after one year: $570 * 1.1 = $627

Same balance as above in the RRSP example, BUT...

If person's tax rate drops in retirement, RRSP outperforms.


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## doctrine (Sep 30, 2011)

And if your marginal tax rate goes up, then RRSPs underperform. It's not unheard of for effective tax rates to be higher in retirement, especially if you are in OAS clawback territory with pension income.


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## steve41 (Apr 18, 2009)

Sherlock said:


> Explanation please!


OK..... here's a 28-year old earning 95K, planning to retire at age 65. He has a 200K mortgage and a 300K home.

In one case he decides to invest in the 'new no cap' TFSA. In the other case he opts to max his RRSP, diverting the overage to the TFSA.

Read the result...... the RRSP option wins out.

RRSP option

TFSA option


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## Nemo2 (Mar 1, 2012)

jamesbe said:


> But what if your RRSP limit is also maxed?
> 
> I welcome any way the gov offers me to reduce tax.


Exactly. I don't work, will never work again, am unable to contribute further to my RRSP, so I fill up my TFSA each year at the earliest opportunity.


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## Sherlock (Apr 18, 2010)

steve41 said:


> OK..... here's a 28-year old earning 95K, planning to retire at age 65. He has a 200K mortgage and a 300K home.
> 
> In one case he decides to invest in the 'new no cap' TFSA. In the other case he opts to max his RRSP, diverting the overage to the TFSA.
> 
> ...


That's just one example, and not a very realistic one either (how many 28 yo's earn 95k? I'm guessing maybe the top 98th percentile of all 28 yo earners)

For those of us who aren't earning a particularly high income now but save a significant portion of it (and therefore expect significant income during retirement) the TFSA easily wins. That's before you even consider that tax rates are likely to be higher in the future.


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## Sherlock (Apr 18, 2010)

GoldStone said:


> Let's assume that the person in this example pays 43% marginal tax rate.
> 
> Scenario 1:
> 
> ...


That's a very simplistic example, but there are other factors to consider too. What if the government raises taxes in the future (a near certainty)? The more I think about the RRSP the less I like it. In my case I think it would even be better to put money in a non-registered account than in a RRSP. For example, if you hold dividend paying Canadian stocks in your RRSP over a few decades, you pay more taxes after all is said and done than if you just hold them in a non-reg account due to the dividend tax credit. That's the problem with the RRSP, everything you withdraw is added to your personal income and taxed at your marginal rate.


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## steve41 (Apr 18, 2009)

Sherlock said:


> That's just one example, and not a very realistic one either (how many 28 yo's earn 95k? I'm guessing maybe the top 98th percentile of all 28 yo earners)
> 
> For those of us who aren't earning a particularly high income now but save a significant portion of it (and therefore expect significant income during retirement) the TFSA easily wins. That's before you even consider that tax rates are likely to be higher in the future.


 OK..... here's a 28-year old earning 65K, planning to retire at age 65. He has a 100K mortgage and a 200K home.

RRSP option

TFSA option


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## GoldStone (Mar 6, 2011)

Sherlock said:


> That's a very simplistic example, but there are other factors to consider too. What if the government raises taxes in the future (a near certainty)? The more I think about the RRSP the less I like it. In my case I think it would even be better to put money in a non-registered account than in a RRSP. For example, if you hold dividend paying Canadian stocks in your RRSP over a few decades, you pay more taxes after all is said and done than if you just hold them in a non-reg account due to the dividend tax credit. That's the problem with the RRSP, everything you withdraw is added to your personal income and taxed at your marginal rate.


Sure, there are tons of factors to consider. Taxes are the most complex part of investing (IMHO). Future tax rates are not known, so invariably we have to make lots of assumptions.

Here's how I look at my own situation. I'm in the 85K to 132K tax bracket. My marginal tax rate is 43.41% (Ontario). I plan to retire early. I expect to drop in the bottom tax bracket when I retire, or the second lowest at most. It's a virtual certainty that my taxes in retirement will drop considerably, even if the government raises taxes in the future.

Re: your example of Canadian dividend paying stocks.

My current marginal rate on the eligible dividends is 25.40%. Marginal rate on the regular income in the bottom Ontario bracket is 20.05%. If tax rates stay the same, it's to my benefit to keep Canadian dividend payers in the RRSP, and pay tax at the regular marginal rate when I withdraw. 5% difference between the two rates gives me some margin of safety against future tax increases.

Again, this is a very simplistic analysis. When I think about the interplay between current and future taxes, my head starts to hurt.


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## jamesbe (May 8, 2010)

I love these conversations, keeps me thinking. I wasn't thinking about the dividend tax credits. Which means dividends in my RRSP are ... well taxed higher.

But What's a guy to do? TFSA maxed... forget the RRSP and go unsheltered? With an income in the top tax bracket I'm not sure that's the best solution either.


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## GoldStone (Mar 6, 2011)

jamesbe said:


> I wasn't thinking about the dividend tax credits. Which means dividends in my RRSP are ... well taxed higher.


Not necessarily. DTC offsets the gross-up. There is no gross-up in the RRSP.

You need to compare two marginal rates:
- current marginal rate on the actual dividends received (not grossed-up)
- future marginal rate on the RRSP withdrawals

http://www.taxtips.ca/marginaltaxrates.htm


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## My Own Advisor (Sep 24, 2012)

Lovin' the TFSA news today. Can't wait for the New Year to start depositing my money.


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## 44545 (Feb 14, 2012)

TFSA versus RRSP comparison: http://worthwhile.typepad.com/worth.../the-basic-arithmetic-of-rrsps-and-tfsas.html


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## My Own Advisor (Sep 24, 2012)

CJOttawa said:


> TFSA versus RRSP comparison: http://worthwhile.typepad.com/worth.../the-basic-arithmetic-of-rrsps-and-tfsas.html


Interesting. I prefer maxing out TFSA over RRSP, but I contribute to both:
http://www.myownadvisor.ca/2011/05/ill-maximize-my-tfsa-first-thanks/


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## steve41 (Apr 18, 2009)

CJOttawa said:


> TFSA versus RRSP comparison: http://worthwhile.typepad.com/worth.../the-basic-arithmetic-of-rrsps-and-tfsas.html


I didn't see any actual numbers. I stand by my analysis.


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## Sherlock (Apr 18, 2010)

steve41 said:


> OK..... here's a 28-year old earning 65K, planning to retire at age 65. He has a 100K mortgage and a 200K home.
> 
> RRSP option
> 
> TFSA option


That's still just an example, you could provide a million examples where the RRSP outperforms the TFSA and it wouldn't prove anything.


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## HaroldCrump (Jun 10, 2009)

steve41 said:


> if they took the TFSA cap away completely.... guess what? the RRSP would still outperform the TFSA..... OUTPERFORM!


Well, then you should also take away the RRSP cap as well.
It will then outperform every other possible investment vehicle.
Basically, you would pay no tax on the returns on your savings.


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## steve41 (Apr 18, 2009)

I guess that's why the RRIF came into the picture.


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## MrMatt (Dec 21, 2011)

doctrine said:


> And if your marginal tax rate goes up, then RRSPs underperform. It's not unheard of for effective tax rates to be higher in retirement, especially if you are in OAS clawback territory with pension income.


RRSPs will lose if that income is taxed at a higher rate, or if there are income based clawbacks.
TFSAs fall behind on international investments as the tax treaties may allow income tax exception for retirement accounts, however the TFSA is NOT a retirement account under international tax treaties.

I think you should target using your RRSP for the lowest brackets.
It's debatable what you do beyond that, and it's basically your personal situation and the assumptions you use, myself I'm doing a mix, but I consider my TFSA a long term/emergency savings account, not specifically a retirement account.


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## Maybe Later (Feb 19, 2011)

Why is it always an either/or comparison? It would seem to me that an approach balancing both the RRSP and TFSA provides for greater opportunity to maximize tax savings, especially considering that it is less simple to predict what programs, tax rates and rules may exist the longer an individual has to their retirement age.


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## Ethan (Aug 8, 2010)

There are several factors that could make the TFSA or the RRSP the better choice.

For instance, if you expect to have a higher income in retirement than you have today, the TFSA makes more sense because your RRSP withdrawals will be taxed at a higher rate than they were contributed at. This is typical for people early in their careers who are anticipating significant increases in their earnings.

If you plan to hold investments in American dividend-paying stocks, the RRSP is better because there are no witholding taxes, whereas witholding taxes are charge in a TFSA.

If you generate exceptional returns, the TFSA is better because those returns are all taxed as income when withdrawn from the RRSP.


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## steve41 (Apr 18, 2009)

Remember.... it isn't the marginal tax rates which count, it is the actual tax dollars you pay, and more specifically... when you pay them. I don't know what educators cover nowadays wrt simple finance, but the Time Value of Money comes into effect here bigtime. In other words..... would you prefer to spend $200 in tax now, or $300 in tax in 10 year's time? This is basic to the "RRSPS are tax neutral" paradigm.

The most efficient plan is one in which the present value of all those future tax payments is minimized.


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## Lephturn (Aug 31, 2009)

For me this is a matter of risk management.

My thinking goes like this:
What will my situation be like if I end up paying a higher tax rate in retirement? - My answer: I will have plenty of income in retirement and can easily bear a slightly higher tax rate.
What will my situation be like if I end up paying a lower tax rate in retirement? - My answer: I may not have enough income to support the lifestyle I would like and may struggle to maintain an acceptable standard of living.

With that in mind, I choose to focus more heavily on my RRSP. It's not all about the financial situation, it's about the risks and challenges I will face when I look out 30 years. Although it is possible that I wind up paying more taxes in retirement because my income is higher, that is a very good problem to have. Should that be the case I could easily afford to pay more taxes without impacting my lifestyle. On the flip side if I am struggling with low income in retirement I may have no easy options to deal with it.

So it boils down to looking at the situation I would be in if my income ends up higher or lower in retirement. I think it's more important to be best prepared for the "less income" possibility.


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## 44545 (Feb 14, 2012)

steve41 said:


> I didn't see any actual numbers. I stand by my analysis.


Unblock images on that website; the numbers are in graphic tables. For example, this one:


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## steve41 (Apr 18, 2009)

Approximated, but it still supports my contention that "RRSPs are Tax Neutral".


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## 44545 (Feb 14, 2012)

steve41 said:


> Approximated, but it still supports my contention that "RRSPs are Tax Neutral".





steve41 said:


> I hate to rain your parade, but if they took the TFSA cap away completely.... guess what? the RRSP would still outperform the TFSA..... OUTPERFORM!



??? Which is it: tax neutral or outperform?

In any case, all of this presupposes that the government won't raise income tax rates at a later date, which would skew preference toward the TFSA, ceteris paribus.


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## steve41 (Apr 18, 2009)

OK.... at the high end, the RRSP outperforms, in the average range, they are close, and at the low end, the TFSA wins. The differences are minor however. As for tax rates rising..... actually they already rise every year..... the brackets are indexed.

The RRSP's main purpose from what I can figure out, is that that immediate tax refund encourages people to save (in their RRSP), and the taxation on RRSP withdrawals discourages them from de-saving. While I am sure all the fiscally clever people on this forum don't need such an incentive to save, the great unwashed do.


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## 1.5M (Apr 21, 2012)

I don't understand what's the argument on choosing rrsp or tfsa. For a 100k income, rrsp is 18% and tfsa is an additional 5%. Anyone should be saving/investing at least 23%, for sure. If you don't maximize both during working years, you are not a a good manager of your working earnings and/or overspending.


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## steve41 (Apr 18, 2009)

Sorry, I mis-spoke when I said the tax rates are rising each year. Indexing the brackets essentially lowers tax over time.


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## Young&Ambitious (Aug 11, 2010)

1.5M said:


> I don't understand what's the argument on choosing rrsp or tfsa. For a 100k income, rrsp is 18% and tfsa is an additional 5%. Anyone should be saving/investing at least 23%, for sure. If you don't maximize both during working years, you are not a a good manager of your working earnings and/or overspending.


That's a nice thought and all, but something called life gets in the way. Besides as you long as you get to your savings goals, the saving rates don't matter. Life is meant to be lived and the now must be weighed against the future and getting that balance right is never easy or black and white.


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## SkyFall (Jun 19, 2012)

Awesome they gave us $500 more to save up! And one think I didn't know, read the last paragraph:

'' For example: If you deposit $5,000 to a TFSA in April 2012, but withdraw $2,000 in October 2012, you'll be able to contribute $7,500 in 2013, which includes the additional $500 announced on Monday. ''

I always thought that if you take let's say $2000 out your contribution next year will still be $5000 or $5500 in the case of 2013!

http://ca.finance.yahoo.com/blogs/in...153235178.html

EDITED:

So if I get it right, let's say I am 21 and I never contribute to any TFSA ever...in 2013 I will be able to contribute to a maximum of $25 500! right? and let say in June 2013 I need that money and I withdraw EVERYTHING! and wait until 2014 I will be able to contribute the $5500 (each year maximum) + the $25 500 (money that I withdraw in June) for a total of $31 000 in 2014?


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## slacker (Mar 8, 2010)

1.5M said:


> I don't understand what's the argument on choosing rrsp or tfsa. For a 100k income, rrsp is 18% and tfsa is an additional 5%. Anyone should be saving/investing at least 23%, for sure. If you don't maximize both during working years, you are not a a good manager of your working earnings and/or overspending.


I think it will be easier for you to understand if you imagine a world where not everyone makes 100k income.


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## SkyFall (Jun 19, 2012)

Wait even worst....what if I never contribute in a TFSA and drop in January 2013 $25 500! and in 6 months (with a sh*tload of luck) I double that because I am some kind of investment guru (which I am not) and end up in June 2013 with a balance of $51 000. And ASAP withdraw $25 500 to buy a car...so in 2014 I am allow to contribute $31 000!??? So confuse!!!!


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## jamesbe (May 8, 2010)

Yes. You got it, and that's why it is good.


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## Jungle (Feb 17, 2010)

For a married couple, you could essentially max TFSA for many years and use that income to retire. This would allow you to apply for low income tax credits. (if they are still around) 

Throw in 10k/ year RSP withdraw each, and you would pay no tax on that either, since the first 10k income is tax free. 

For someone with a dividend strategy that only wants $30-40k year to retire, this could easily work to your advantage. 

I figured out my spouse and I could withdraw 20k each in dividends a year from RSP tax free, then use any income from TFSA and claim about $2500 in tax credits. Ha! I don't feel so bad for our gov wasting my tax dollars now.


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## Eclectic12 (Oct 20, 2010)

Going back to the original content - I think the big surprise is that the extra $500 is being announced so far before Jan 1, 2013!

As I recall - we were wondering about the 2012 limit possibly increasing into Dec.


Cheers


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## P_I (Dec 2, 2011)

This increase was very easy to predict. The best explanation is from http://www.fin.gc.ca/n12/data/12-151_1-eng.asp:


> The $5,000 annual contribution limit is indexed to inflation using the Consumer Price Index (CPI) data as reported by Statistics Canada, rounded to the nearest $500. This means that, each year, an unrounded indexed amount is calculated based on increases in the CPI, but the annual contribution limit changes only when the unrounded amount reaches the rounding threshold (see the table below). For 2013, the unrounded indexed amount moved beyond the $5,250 threshold for the first time, so the annual contribution limit increases to $5,500.


For 2012 the unrounded indexed amount was known to be $5243. Therefore only CPI only had to be enough to increase it over the $5250 threshold. 

It is left as an exercise to the reader to calculate when the next raise to $6000 will occur (hint, the unrounded indexed amount needs to move from the current [2013] value of $5348 to beyond $5750).


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## GoldStone (Mar 6, 2011)

P_I said:


> It is left as an exercise to the reader to calculate when the next raise to $6000 will occur


CPI 1.5% - 5 years
CPI 2.0% - 4 years
CPI 2.5% - 3 years


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## carverman (Nov 8, 2010)

steve41 said:


> I hate to rain your parade, but if they took the TFSA cap away completely.... guess what? the RRSP would still outperform the TFSA..... OUTPERFORM!


I dont see it as an investment vehicle. It's basically a rainy day savings account that you can pull out anytime without having to deal
with the tax man also taking a tax bite from the amount that you take out. 
Can't have it both ways...cash liquidity ( at very low rate of return from the banks) vs regular RRSP investments.


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