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Tax Strategy: Know the ins and outs of TFSAs

With tax-free savings accounts, there are three distinct amounts to keep in mind. The first is the annual contribution limit, which in 2015 is $5,500. That’s the maximum amount of new money you can put into a plan each year. If you’ve contributed the maximum since the TFSA was introduced, you’ve put in $36,500 so far (this year included). If you haven’t topped up every year, the unused contribution room carries forward. The second key number is the actual asset value of your plan; it incorporates the returns generated over time by your TFSA contributions. If you’ve been investing in fixed-income products, it probably won’t be much larger than the amount you contributed, but if you’ve been investing in the stock market, it may be significantly larger (or smaller). The asset value sets the framework for the final key number, money withdrawn. You can withdraw as much as the total current value of your TFSA at any time, without any tax consequence, and that amount gets added back to your TFSA contribution room on Jan. 1 of the following year. So in the example submitted by the reader, he regained $10,000 of contribution room on Jan. 1 this year to replace last year’s withdrawal of $10,000. If he doesn’t replace the full amount in 2015, not to worry: the difference carries over as part of his unused contribution limit.

With tax-free savings accounts, there are three distinct amounts to keep in mind.

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