TFSA limits lower in 2016, but past contribution room remains

Don't panic. Liberals may have rolled back the Conservatives' increase for tax-free savings accountlimits but you aren't losing any contribution room that has already accumulated.

On Jan. 1, the annual contribution limitfor tax-free savings accounts will be $5,500,instead of the $10,000the previous government had implemented for 2015.

The rules aroundthe accountsallow the contribution limits to accumulate starting from 2009 for each year during which a personturned or was 18 years of age, held a social insurance numberand was aresident of Canada.

The limit for anyone opening an account today wouldbe $41,000 and will rise by another $5,500 on Jan.1. Someone opening an account after Jan.1would be able to contribute $46,500.

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The Liberals ran on a campaign pledge to rollback the $10,000 annual contribution limit to $5,500 and then index future increases.

Futureannual increase will be pegged to inflation rounded to the nearest $500 increments. Assuming an average two per cent inflation rate, the contribution limit will onlyhit $10,000 in the year 2045 under the current changes.

The Conservatives, who first created the tax-free accounts and then pledged the increase to a$10,000 annual limit last year, say the rollback will disproportionately harm seniors as they look to protect their savings for retirement.

Statistics from the Canada Revenue Agency show that fully 25 per cent of all tax-free savings account holders in 2013 the most recent year for which data is publicly available were over the age of 65.

The same database also shows 32 per cent of seniorshit the maximum contribution that year;the annual contribution limit in 2013 increased to $5,500.

It's not until 2017 thatstatistics onhow many people reached this year's $10,000 limit are set to be revealed, but the rate has been on a downward trend since the beginning.

11million people with TFSAs

In the first year of the accounts' creation in 2009, nearly five million people opened an account and64 per cent of them deposited the thenmaximum $5,000 over the course of the year.

In 2013, nearly 11million people held one of the accounts but only 18 per cent of them hit the contribution ceiling.

Those who have researched the brief history of these accounts say the fact that fewer and fewer people reach the limit each yearsuggests many tax-free accountusers haveother savings accounts and are transferring the money into the sheltered accounts or arebanking the money for wealthier relatives who have maxed out their own contribution limits to a tax-free account.

That theory gainscredence when you consider that in2013, nearly a quarterof those hitting the contribution limit had incomes of less than $25,000.

Nonetheless, the government does say lowering the annual contribution limit to $5,500 from $10,000 is expected to increase its tax revenues by $80million next year. A look at the numbers suggests that money will be the sum of many small amounts.

The interest earned on a regular savings account is declarable income and subject to the tax appropriate for your income level.

The contribution limit being lowered by $4,500 next year could mean an additionaltax bill of $67 for the year onsomeone earning up to $45,000 a year up to about $150 for those earning more than $200,000 and subject to the new tax bracket of 33 per cent.

That's assuming a rate of return of 10 per cent on the tax-free savings account, which is morethan most financial advisers would suggest planning on, especially for seniors who are recommended to invest conservatively in order to protect their savings.