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TFSA limits get extra boost in 2013

Now in its fifth year, the Tax-Free Savings Account has become hugely popular. Approximately 8.2 million Canadians had opened an account and roughly 2.5 million had contributed the maximum amount in 2011, according to the Finance Department. Starting this year, the annual contribution limit rises by $500 to $5,500 to reflect inflation "creep" since the TFSA was launched in 2009. The maximum total contribution is now $25,500.

As you may know, they’re not called tax-free for nothing. No income - interest, dividends or capital - or withdrawals are ever taxed. What's more, any contribution room you don't use up in a given year is automatically carried forward for future years and no room is forfeited when you make withdrawals.

The only potential hitch with TFSAs is this: If you contribute more than your limit, the excess will be hit with a stiff penalty of 1% a month. And, if you have used up your room and then withdraw funds, you must wait until the next calendar year to redeposit them. Otherwise, the government considers the redeposit an excess contribution and will impose the monthly penalty.

Aside from this caution, TFSAs are exceptionally valuable and versatile. Here are just a few strategies to consider:

-With $25,500, you have plenty to establish a portfolio of equity and fixed-income funds for your retirement. A big plus for using TFSAs to supplement income from your RRSPs or RRIFs is that withdrawals won't trigger any OAS clawback or affect other government benefits, and you're never required to make minimum withdrawals.

-In the medium term, you can use a TFSA to save up for a goal like a new car, a down payment on a house, or to make an annual prepayment on your mortgage.

-A TFSA is also suitable for an emergency fund. Just be sure to keep some liquid investments (e.g. money market fund) for immediate access.

With so many choices, it's worth taking the time to determine how each adult in your family can capitalize on this opportunity. To learn more, give us a call.


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