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Ted Menzies, the minister of state for finance, announced Monday that the annual contribution limit for tax-free savings accounts will increase in 2013 by $500 to $5,500. (Adrian Wyld/Canadian Press)

The amount Canadians can stash away each year in tax-free savings accounts is increasing by $500 to $5,500, starting Jan. 1, 2013, the federal government announced this morning.

Ted Menzies, the minister of state for finance, and Revenue Minister Gail Shea made the announcement in a release issued Monday.

"We are very pleased to offer Canadians ways to save on taxes and keep more of their hard-earned money," Menzies said in the release, touting the accounts as a valuable savings tool for many Canadians.

When the TFSA was introduced in 2008, the federal government said it intended to index the contribution limit to inflation in $500 increments. Next year will be the first time a $500 incremental increase takes effect.

The finance department says TFSAs are popular with Canadians: 8.2 million have opened an account and roughly 2.5 million Canadians contributed the maximum amount in 2011.

Any adult Canadian can open a TFSA and use it for a range of investments, such as mutual funds, guaranteed investment certificates, securities or simple savings accounts.

Interest, dividends and capital gains earned in these accounts are not subject to tax. Unused contribution room is carried forward and accumulates for future years, meaning someone who has not used this tool since it was introduced could have $25,500 of contribution room available to them in 2013.

Spouses can contribute to each other's TFSAs.

Funds can be withdrawn tax-free at any time for any purpose, and re-contributed later in the year, only if the TFSA has unused contribution room. Some confusion arose when the TFSAs were first introduced over this practice, and Canadians who mistakenly contributed too much were given a break.

During the 2011 election, the Conservative platform pledged to double the annual contribution limit for TFSAs to $10,000 per year, but this promise will not be kept until after the budget is balanced, according to the Conservatives' 2011 election platform. 

 In his fall economic update two weeks ago, Finance Minister Jim Flaherty said it will now take one year longer than earlier expected to balance Canada's books.