Inflation is one of those buzzwords that we’re hearing a lot of lately. Even if you’re not a financial enthusiast, you definitely would have noticed a price increase in almost everything around you. The only positive outcome from inflation is that the TFSA contribution for next year has increased to $6,500, which is a $500 increase. The 2023 TFSA limit has been set at $6,500 for 2023, increased from $6,000 in 2022.This increases the lifetime limit to $88,000 for individuals who have been eligible (at least 18 years old), since its inception in 2009.Canadians can now invest up to this amount in their Tax-Free Savings Accounts (TFSAs) which will grow tax-free and can be withdrawn anytime without having to pay tax on it. This makes them a smart option for those looking to save for retirement or other significant expenses.The higher 2023 TFSA limit allows Canadians to invest more tax-free and accumulate wealth faster to reach their financial goals.

What is a TFSA?

A Tax-Free Savings Account (TFSA) is an investment account that allows Canadians to put away money and watch it grow tax-free. TFSAs also offer flexibility, as there are no restrictions on how the money within it can be invested. The other advantage is that there are no restrictions on when the funds can be withdrawn from your TFSA. Still, if you're using it to hold only cash, you're not making the most of the tax advantages which guard your investments against taxes as they grow.

Who qualifies to contribute?

Anyone 18 or older with a valid social insurance number (SIN) can contribute to a TFSA. And the best part is contribution room begins accumulating the year the person turns 18, so if you don't have the funds at 18, you can utilize that accumulated room later.

Differences between TFSA and RRSP

A Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP) are two of the most popular options for Canadians looking to save money with tax advantages. Understanding the difference between both is essential before deciding which is best for your financial goals.With a TFSA, you do not receive a tax deduction upon contribution, but you don't have to pay income tax on any returns you earn from your investments, and money can be withdrawn at any time with no penalties. This makes it beneficial for any savings goal, not just retirement.On the other hand, an RRSP is designed specifically to help save for retirement. Contributions are tax-deductible, meaning you can subtract the contribution amount from your income to reduce your taxes. Ideally, this is in your high-income earning years when you are in a high tax bracket. Then, any money withdrawn (hopefully later in life when your income is lower) is taxed as regular income.A TFSA and RRSP would offer a similar outcome only if you contributed and withdrew when you were in the same tax bracket.

Where can I find my TFSA contribution room?

You can check CRA My Account or call the Tax Information Phone Service (TIPS) at 1-800-267-6999. Keep track of your withdrawals and contributions, though, as CRA may not have up-to-date information, which is only updated annually by TFSA issuers.

Withdrawals from a TFSA?

You can withdraw from a TFSA at any time without implications and get that contribution room back, but you need to ensure you do not contribute that amount again until the following calendar year.

What happens if I over-contribute to my TFSA?

If you over-contribute to your TFSA, you will pay 1% per month of the excess until the excess is removed.For example, if you overcontribute to your TFSA by $3,000, you will be charged a penalty of $30 per month until you take it out. So it is important to be aware of your contribution room.

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The new 2023 TFSA limit provides Canadians with an opportunity to maximize their savings and the potential to improve their tax situation as well. With the higher TFSA limit, individuals can grow their investments tax-free and reap the benefits for years.If you're looking for an easy, reliable and secure way to file your taxes this season, CloudTax can help. Our platform is built with Canadians in mind and comes complete with various features to make filing your taxes easier than ever. With CloudTax, you can quickly and easily file your taxes online - DIY for free, get expert help or let a tax expert file for you. Get started today - maximum tax refund guaranteed!Disclaimer: This article is provided for informational purposes only and should not be considered financial advice. Please consult a qualified professional before making any decisions related to your financial planning.