Bill Morneau, Canada’s Finance Minister, has announced that the annual contribution limit for Tax Free Savings Accounts (TFSAs) will be reverted to $5,500 in 2016. The Conservative government had increased the limit to $10,000, a move that was criticized by many as being only beneficial to the rich.
This reversion comes as no surprise as Prime Minister Trudeau had pledgd to revert the limit since it was introduced. However, the move is not particularly popular. 67 per cent of Canadians polled during the election didn’t want any changes made to the higher TFSA limit.
The Canadian government has stated that the reversion is necessary to balance out the tax cuts they intend to implement for the middle class. The middle-income tax bracket will drop from 22 per cent to 20.5 per cent, saving as much as $670 per year on taxes for Canadians who earn between $44,700 and $89,401. At the same time Canadians who earn more than $200,000 per year will now be taxed at 33 per cent.
Canadians who have been maxing out their TFSAs (approximately 6.7 per cent of all account holders) don’t need to panic. The limit will remain at $10,000 for 2015 and will count towards your total lifetime contribution room. Like RRSPs any unused annual contribution room will roll over into the following years. Many Canadians prefer TFSAs over RRSPs because they offer a flexible way to set cash aside and grow investments with earnings remaining tax free. Also, unlike RRSPs there are no strings as to when you can access your cash and there are no tax penalties associated with withdrawing funds.
TFSAs have been highly favoured by individuals who do not have time on their side such as seniors who started saving later or Canadian newcomers. The higher limit made it easier for those who took full advantage of the annual limit to ramp up savings faster, benefit sooner from the tax free growth and access the funds when they needed to without any restrictions. Nearly half of all TFSAs belong to Canadians over 55.
Though annual contribution levels have been reverted they will not stagnate. Prior to the Conservative’s increase TFSA limits were indexed to inflation so that they could be increased in $500 increments if inflation wiped out $250 in value from savings. This is why in 2013 the limit was raised from $5,000 to $5,500. This ability to reindex has been reintroduced by the new Canadian government so that another increase could be implemented if necessary.
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