Analysis

TFSA limits lower in 2016, but past contribution room remains

Don't panic. Liberals may have rolled back the Conservatives' increase for tax-free savings account limits — but you aren't losing any contribution room that has already accumulated.

Liberals have rolled back tax-free savings account contribution limits

The Liberals under new Finance Minister Bill Morneau may have rolled back the Conservatives' increase for tax-free savings account limits — but you aren't losing any contribution room that has already accumulated. (Chris Wattie/Reuters)

Don't panic. Liberals may have rolled back the Conservatives' increase for tax-free savings account limits — but you aren't losing any contribution room that has already accumulated.

On Jan. 1, the annual contribution limit for tax-free savings accounts will be $5,500, instead of the $10,000 the previous government had implemented for 2015.

The rules around the accounts allow the contribution limits to accumulate starting from 2009 for each year during which a person turned or was 18 years of age, held a social insurance number and was a resident of Canada.

The limit for anyone opening an account today would be $41,000 and will rise by another $5,500 on Jan. 1. Someone opening an account after Jan. 1 would be able to contribute $46,500.

How are tax-free savings accounts different from registered retirement savings plans? James Fitz-Morris explains your options 2:17

The Liberals ran on a campaign pledge to roll back the $10,000 annual contribution limit to $5,500 and then index future increases.

Future annual increase will be pegged to inflation — rounded to the nearest $500 increments. Assuming an average two per cent inflation rate, the contribution limit will only hit $10,000 in the year 2045 under the current changes.

The Conservatives, who first created the tax-free accounts and then pledged the increase to a $10,000 annual limit last year, say the rollback will disproportionately harm seniors as they look to protect their savings for retirement.

Statistics from the Canada Revenue Agency show that fully 25 per cent of all tax-free savings account holders in 2013 — the most recent year for which data is publicly available — were over the age of 65.

The same database also shows 32 per cent of seniors hit the maximum contribution that year; the annual contribution limit in 2013 increased to $5,500.

It's not until 2017 that statistics on how many people reached this year's $10,000 limit are set to be revealed, but the rate has been on a downward trend since the beginning.

11 million people with TFSAs

In the first year of the accounts' creation in 2009, nearly five million people opened an account and 64 per cent of them deposited the then maximum $5,000 over the course of the year.

Financial advisers recommend contributing to both a registered retirement savings plan and a tax-free savings account. (Ryan Remiorz/Canadian Press)

In 2013, nearly 11 million people held one of the accounts — but only 18 per cent of them hit the contribution ceiling.

Those who have researched the brief history of these accounts say the fact that fewer and fewer people reach the limit each year suggests many tax-free account users have other savings accounts and are transferring the money into the sheltered accounts or are banking the money for wealthier relatives who have maxed out their own contribution limits to a tax-free account.

That theory gains credence when you consider that in  2013, nearly a quarter of those hitting the contribution limit had incomes of less than $25,000.

Nonetheless, the government does say lowering the annual contribution limit to $5,500 from $10,000 is expected to increase its tax revenues by $80 million next year. A look at the numbers suggests that money will be the sum of many small amounts.

The interest earned on a regular savings account is declarable income and subject to the tax appropriate for your income level.

The contribution limit being lowered by $4,500 next year could mean an additional tax bill of $67 for the year on someone earning up to $45,000 a year — up to about $150 for those earning more than $200,000 and subject to the new tax bracket of 33 per cent.

That's assuming a rate of return of 10 per cent on the tax-free savings account, which is more than most financial advisers would suggest planning on, especially for seniors who are recommended to invest conservatively in order to protect their savings.

Comments

To encourage thoughtful and respectful conversations, first and last names will appear with each submission to CBC/Radio-Canada's online communities (except in children and youth-oriented communities). Pseudonyms will no longer be permitted.

By submitting a comment, you accept that CBC has the right to reproduce and publish that comment in whole or in part, in any manner CBC chooses. Please note that CBC does not endorse the opinions expressed in comments. Comments on this story are moderated according to our Submission Guidelines. Comments are welcome while open. We reserve the right to close comments at any time.