As widely anticipated, Finance Minister Bill Moreau announced that the Tax Free Savings Account (TFSA) contribution limit for 2016 will be reduced to $5,500. This is in line of what the Liberals had stated during their election campaign. There has been a lot of questions on the TFSA 2016 contribution limit after the Liberals got elected and it's nice to finally get these questions answered. Although the TFSA contribution limit will fall back to $5,500 for 2016, it will be indexed to inflation. Luckily, the 2015 contribution limit of $10,000 will not change. The Liberals government has decided not to do a retroactive clawback. Let's just consider the one time $10,000 contribution limit as a goodbye gift from the Harper government. I've never been a Harper fan but that is one heck of a goodbye gift.
So what does this mean?
Since the late Jim Flaherty announced the TFSA in 2009, the yearly contribution rooms are below:
2009 - $5,000
2010 - $5,000
2011 - $5,000
2012 - $5,000
2013 - $5,500
2014 - $5,500
2015 - $10,000
2016 - $5,500
This means a total of $46,500 for any Canadian citizens or permanent residents that are older than 18 since 2009. That's a lot of money one can put aside and have it grow completely tax-free! Yes it's called the Tax Free Savings Account but really it should be called the Tax Free Investment Account! It always blows my mind to hear that not every Canadian is taking advantage of this amazing gift from the Canadian federal government. Unlike the Registered Retirement Savings Plan (RRSP), the TFSA has no withdrawal rules. This is why I truly believe that the TFSA is a more powerful investment vehicle than the RRSP. Furthermore, the lack of withdrawal rules mean that early retirees can use the TFSA without having to worry about taxes or clawback. For Mrs. T and I, the dividend stocks held in our TFSA's will be a major income source once we are financially free. Perhaps we should rename this amazing account the Tax Free Retirement Account!
Let's see how powerful the Tax Free Retirement Account is should we?
If you have not opened a TFSA and decided to contribute $46,500 on Jan 2nd, 2016. After 25 years, growing at the average S&P 500 annual return rate of 7.0%, the account will grow to $252,375.62.
And that's completely tax-free!
Now assuming you contribute $5,500 for every year for 25 years, the total amount after 25 years will grow to $624,596.20!!!
Since the contribution room will be indexed to inflation, this means the contribution room will grow over time, so the total dollar amount in your TFSA will be more than $624k after 25 years, assuming 7% annual return rate and that you contribute the max allowable amount each year.
If you're married or have a spouse, that's over $1.2 million of tax-free money at your disposal. That's a good amount of tax-free money to use in retirement year if you ask me. 🙂
Be careful though, you do not want to over contribute to your TFSA or you will get hit by a big over-contribution penalty.
While I'm a bit disappointed that the TFSA contribution room will be reduced in 2016, I'm extremely happy to hear that the contribution room will be indexed to inflation and the Liberal government has decided not to scrap the TFSA. The late Jim Flaherty will smile from the heaven knowing that he has created a legacy in Canadian history. 🙂
With $11,000 combined between Mrs. T and I, we'll have to take a look in the Canadian stock market and decide which dividend stocks to purchase. Like last year around this time, we've not decided what to buy. Banking stocks like Royal Bank, TD, and Bank of Nova Scotia continue to be intriguing. The oil & gas and resource sectors have taken a huge beating the past year but it may be worthwhile to invest in solid dividend stocks like Suncor, Enbridge, or Canadian Natural Resources. I also think that the Canadian REIT's are a bargain right now, although we're slightly over-weigh than our target currently. We have saved up enough money and are ready to transfer the money to our TFSA's on Jan 2nd. The possibilities are endless and I'm so excited about the major stock shopping spree that we will have in early 2016. I'm almost more excited about the impending stock shopping spree than Christmas! Shhh don't tell Mrs. T about that though. 😉 :p
Dear readers, what do you plan to do with your 2016 TFSA contribution room? (For American readers out there, Roth IRA is the TFSA equivalent in US).