Rising inflation has triggered a $500 increase in the annual limit for Tax Free Savings Accounts.
As of Jan. 1, 2023 the new limit will be $6,500 annually up from $6,000 in 2022.
The change is the first increase since 2019 and is contained in a list of adjustments for 2023 made by the Canada Revenue Agency (CRA). The CRA annually reviews personal income tax exemptions including such things as GST credits and Canada child benefit payments.
TFSAs were introduced in 2009 to encourage Canadians to save for retirement. The increase means that the total contribution room available in 2023 for someone who has never contributed to a plan is $88,000.
The annual limit is indexed to inflation and increased when the cumulative impact of inflation reaches $500. The increase for 2023 is 6.3%, up from 2.4% in 2022 which triggered the rise.
The difference between a TFSA and a Registered Retirement Savings Plan (RRSP) is that contributions to an RRSP are tax deductible, while a TFSA contribution is made with after tax money.
Money inside a TFSA grows tax free and amounts withdrawn in any year can be added back, but only in the next calendar year. RRSP withdrawals are taxed at your rate.
The name confuses many people because they think a TFSA is a savings account, but it can hold bonds, stocks and ETFs, as well as cash.
Which one is better? It depends on your circumstances. Both a TFSA and an RRSP are a great way to save.