TFSA to be reduced to $5,500 in 2016

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!


No tax!

Now assuming you contribute $5,500 for every year for 25 years, the total amount after 25 years will grow to $624,596.20!!!

Holy batman!

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).

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  • Reply
    December 8, 2015 at 6:17 am

    It’s too bad the finance minister rolled back the limit. But I guess $625K is still quite a lot of money. A couple can comfortably live off $1.25 million of tax free, liquid net worth. I plan to buy more REITs with my contribution room next year. 🙂

    • Reply
      December 8, 2015 at 11:53 am

      $625k tax free money is a lot of money whichever way you slice it. 🙂

  • Reply
    December 8, 2015 at 6:20 am

    One of the best tools available for retirement. Keep on saving and building that account up.


    • Reply
      December 8, 2015 at 11:54 am

      Hi R2R,

      Totally. I don’t understand why so many people don’t even have a TFSA.

  • Reply
    December 8, 2015 at 8:09 am

    Ouch, sad to see the lowering of the contribution amount. I’m liking TD right here, and initiated a new position this morning. BCE is also holding up very well, so some $$ were added to that position as well.

    Good luck, Tawcan!

    • Reply
      December 8, 2015 at 11:54 am

      I’d love to add more TD. It’s a great stock to own.

  • Reply
    Team CF
    December 8, 2015 at 8:54 am

    Have fun investing in the new year! Too bad the limit got lowered, but as you already noted, it still is a good amount of money that can grow tax free. Interesting to see what stocks you will buy. Good luck!

    • Reply
      December 8, 2015 at 11:55 am

      We’ll post an update whenever we pull the buy trigger in 2016. 🙂

  • Reply
    December 8, 2015 at 1:58 pm

    Definitely a good tool! I use both (TFSA and RRSP) to take advantage of all tools available. But yes, TFSA remains unknown for many and it’s a shame!

    Waiting for your stock shopping spree results! 😉



    • Reply
      December 9, 2015 at 11:43 am

      Will update the stock shopping spree later for sure.

  • Reply
    Thias @It Pays Dividends
    December 8, 2015 at 5:31 pm

    Did I understand you correctly that you can contribute to it but take withdraws from the account whenever you want? No age limit? If so, that is a lot better than a Roth IRA in the US since we can other withdraw our contributions before 59.5. I maxed out my Roth this year and hoping to get my wife’s fully funded as well. Too bad they rolled back the contribution limit.

    • Reply
      December 9, 2015 at 11:45 am

      Hi Thias,

      Yes there’s no withdrawal rules for TFSA so it’s much better than the Roth IRA in the US. It’s a wonderful tool to use for savings/retirement.

  • Reply
    My Road to Wealth and Freedom
    December 8, 2015 at 6:30 pm

    I was very disappointed to see the TFSA contribution rolled back to $5500, but like you say, at least it’s indexed to inflation. I think I’ll slide some beaten up BNS shares into my TFSA next year. I’m watching TRP and ENB, they’re looking pretty cheap right now.

    • Reply
      December 9, 2015 at 11:45 am

      Hi My Road to Wealth and Freedom,

      BNS, TRP, and ENB all look very interesting. Hopefully the price will stay low for the next little while.

  • Reply
    December 9, 2015 at 4:31 am

    Wow if we had a TFSA in the US that would be fantastic. The IRA and Roth IRA are offputting because of the restrictions of when you can withdrawal and then the taxes when you do withdraw.

    • Reply
      December 9, 2015 at 11:46 am

      I’m definitely glad that the TFSA isn’t as restricting compared to the IRA and Roth IRA. It makes planning a lot simpler because the lack of withdrawal rules.

  • Reply
    December 9, 2015 at 1:04 pm

    I hated when TFSA was rolled back. I can’t believe the government acted this quickly this time. Haha

    • Reply
      December 10, 2015 at 8:15 am

      It was shockingly fast. I didn’t know the government can act that quickly.

  • Reply
    December 11, 2015 at 3:05 pm

    I am still playing catch-up on my TFSA as I hadn’t been contributing to it at all… It is too bad that the TFSA limit was decreased again, but part of me is seeing this as a positive because it’s not quite so overwhelming to catch up now…

    • Reply
      December 14, 2015 at 10:50 am

      In the perfect world the TFSA limit would stay at $10,000 and indexed to inflation. But obviously that’s not going to happen. 🙁

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