$500 boost to TFSA limit in 2013

In 2013, you will be able to contribute an additional $500 to your Tax-Free Savings Account (TFSA), taking the annual contribution limit to $5,500.

When the TFSA was introduced in 2009, the federal government promised the $5,000 annual contribution limit would be indexed to inflation in $500 increments. Next year, the first increment takes effect. The contribution limit for 2013 becomes $5,500; the limit for calendar 2012 remains $5,000.

Under the TSFA program, each calendar year Canadians 18 years of age and older can contribute up to $5,000 — $5,500 as of Jan. 1 — to a TSFA. All income (interest, dividends and capital gains) earned within the TFSA and withdrawals from a TFSA are generally tax-free. Nor does having a TFSA affect federal benefits and credits.

There are other benefits to a TFSA. Unlike an RRSP, you can withdraw funds from your TFSA tax-free at any time for any purpose. Unlike a RRSP, however, there is no deduction from taxable income for contributing. TFSA contributions are made with after-tax dollars.

Withdrawals made from the TFSA as well as unused contribution room carry forward and accumulate for future years.  In fact, if you have unused TFSA contribution room, you can re-contribute withdrawn amounts in the same year as you made the withdrawal. If not, you have to wait until the following year.

If you contribute more than your allowable TFSA contribution room, the Canada Revenue Agency (CRA) warns, you will be considered to be overcontributing to your TFSA and you will be subject to a tax equal to 1% of the highest excess TFA amount in the month, for each month you are in an excess contribution position.

For more information on TFSAs, go the CRA website.