What a year we have just seen. From the precipitous market drop of 2008 to the bottoming last March, followed by a quick climb and still the potential for a double dip to come – it’s been a wild ride.
And what an introduction for the tax-free savings account (TFSA)!
The take-up on TFSAs has been encouraging, but one might wonder what effect the timing of this economic downturn could have on TFSA contribution room.
Indexing contribution room
One of the distinctive aspects of the TFSA offering is the manner by which contribution room is designed to keep up with inflation.
The initial $5,000 annual TFSA dollar limit available in 2009 is to be bumped every few years by $500 increments. This ”bump” is really a rounded representation of an underlying base figure that is adjusted annually. When this base figure reaches the mid-point (e.g., $5,250), that dollar limit is taken to the next $500 threshold, which will be $5,500 the first time.
This process means that inherently the TFSA dollar limit will be slightly behind inflation initially, and slightly ahead as each threshold is reached, but on balance remain in sync with inflation over the long term.
That first $500 threshold?
The indexation factor for 2010 is based on CPI growth from September 2008 to September 2009, which computes to a mere 0.6%. Our underlying base figure for the TFSA dollar limit in 2010 is therefore $5,029. For some historical context, the annual indexation factor in the preceding four years has been about 2% or so (refer to the table below.)
TABLE: Recent years’ indexation factors
2006 2007 2008 2009
2.33% 2.10% 1.9% 2.5%
Generally we can expect to see the limit raised about every fourth year. Depending on the speed of the forthcoming recovery, we could be looking at 2012 or 2013 for that first increase. Don’t wish too hard for the earlier date, by the way; after all, it would just mean that intervening inflation had risen higher.
Your annual client reminder
Regardless of when the first indexation increment happens, the key is to remind your clients in your annual reviews that they get more room every year and they should make good use of it.
As well, check the age of their children to get them started, too. I was floored when I realized that 1992 is the birth year for those turning 18 in 2010, as my own nephew – my parents’ first grandchild – was born that year.
Many happy returns – both personal and financial – to you and your clients!