TFSA back to $5,500: what to do

It’s official. The $10,000 TFSA limit is rolling back to $5,500. The change is effective January 1, 2016, so clients will not be affected for 2015.

That means there’s no rush to contribute, says Jamie Golombek, managing director, Tax and Estate Planning with CIBC Wealth Advisory Services. “You’ve got an indefinite amount of time to top up to $10,000,” he explains. “The legislation says the 2015 limit is staying at $10,000, so if you don’t have the money this year, you can top up in 2016” or later. “Remember, the TFSA contribution room carries forward annually automatically.”

Read: A little-known TFSA fact

If taxpayers have the money to contribute, he says, they should put it in as soon as possible. But if not, “there’s no rush anymore, because we have certainty that we’ve locked the $10,000 limit in for 2015. Next year’s limit will go to $5,500, which means if you haven’t done the $10,000 this year, you can do it next year, and you’ll have another $5,500 next year.”

Monday’s Dept. of Finance announcement also stated that annual TFSA limit indexing, which was eliminated earlier this year, will return. The TFSA limit will be rounded to the nearest multiple of $500, and if the amount is “equidistant from two such consecutive multiples,” the limit will be rounded to the higher multiple of $500.

“That makes sense; otherwise, it’s very hard to track,” says Golombek. “For instance, […] because it’s not rounded, no one remembers the exact number of the RRSP contribution limit year to year. The TFSA has tried to solve that by introducing a rounding factor.”

Read: Canadians risk paying more tax if they wait to plan: Golombek

Clients mourning the lost $4,500 2016 room? In addition to maximizing RRSPs, Golombek suggests clients could put more in RESPs if they have children. “They could contribute beyond the $2,500 a year to maximize the Canada Education Savings Grant, since you put up to $50,000 per child in an RESP.”

Other options include paying down high-interest debt and investing in a permanent UL or WL insurance policy “to achieve further tax sheltering.”

As of 2016, the cumulative TFSA limit for people eligible to contribute since 2009 will be $46,500.

Read: TFSA designations may cause estate problems

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.