When the TFSA was created in 2009, the government allowed Canadian adults (18+) to contribute $5,000 per year in the account. But this amount was subject to inflation (the increase in the average cost of life). In 2013, when inflation had increased enough, the contribution limit increased to $5,500 per year - today's current yearly contribution limit. The one historical exception to this yearly limit is in 2015, where the government changed the limit to $10,000 per year but decided to reverse the idea the following year. Complicated, right? Don't worry, here's a visual aid to help you understand your contribution room.
|Year||TFSA Annual Limit||Cumulative Total|
So how much money can you contribute today if you were a Canadian citizen since 2009 and never funded a TFSA before?
|How old are you?||Available Room|
Warning: make sure you don't over-contribute to a TFSA. If you go over your limit, you'll be penalized 1% per month on the over-contributions. Don't worry, Mercer Invest Wise can help you track your contributions so you never have to worry about going over your limit. Just click on your Mercer Invest Wise TFSA and click on Start tracking your contribution room: "Manage" to get started.
Great, so now that you know the rules around the contributions, here's how much you should be putting aside. Although it's not always easy, we recommend saving about 20% of your income for future you. The more you save, the better off you will be in the future. However, here is a good practice for saving:
- Make a budget and determine your monthly expenses. Be realistic. From your income, make sure you keep enough to cover those expenses.
- The income above your monthly expenses can go towards your savings.
- Before contributing to your TFSA, make sure to keep 3-6 months of living expenses in an emergency fund - This is money that can be used in case of an unexpected expense. These funds should be in a chequing or savings account to make sure they're liquid and accessible.
- Once you have a well-cushioned emergency fund, any additional income above your monthly expenses can be contributed to your TFSA.
Eventually, you will have maxed out your TFSA contribution room. If you have additional funds you'd like to invest, you should consider using an RRSP. If your RRSP is already maxed out, then you'll have to use a personal (non-registered) account.