The Power of the TFSA
As the calendar year changed on January 1, so did the Tax Free Savings Account (TFSA) contribution room available to all adult residents of Canada.
Although indexing did not increase the earned contribution room, everyone can now contribute at least $5,500 more to their TFSAs. Those who made withdrawals in 2013 can now put back the money withdrawn in addition to the extra $5,500. For those who have never made a TFSA contribution, the accumulated TFSA room is now $36,500 (less if they are between 19 and 24).
Through the power of tax-free compounding the TFSA can yield spectacular results, especially for those who are young enough for compounding to do its magic.
If you’ve put the maximum into your TFSA at the beginning of each year and it earned 5% income in each year, your current balance (after your last deposit) will be over $40,800. See the table below.
YearContributionInterest EarnedEnding Balance2009$5,000$250.00$5,250.002010$5,000$262.50$10,512.502011$5,000$525.63$16,038.132012$5,000$801.91$21,840.032013$5,500$1,092.00$28,432.032014$5,500$1421.60$35,353.632015$5,500$1767.68$42,621.32
For the younger generation, consider the potential for a tax-free retirement. Making the maximum contribution each year starting at age 19 would yield a nest egg of about $900,000 at age 60 (assuming 5% annual return, 2% inflation, no change in maximum contribution levels and no withdrawals). Even in today’s dollars, that’s $400,000 in spending power. For a couple that’s $1.8 million dollars. Even assuming an extended 40-year retirement, that’s an indexed tax-free pension of over $74,000 a year ($33,000 in current dollars).