It's difficult to believe that some good could actually come out of the COVID-19 pandemic, but it's true. While the ongoing health crisis has disrupted social, political, and economic systems around the globe, it has also influenced many people to change their lifestyles for the better. In Canada, such a change was apparent in people's spending and saving habits, which saw a notable improvement compared to previous years.
Over the last decade, Canadians had been faced with mounting financial troubles caused by their overspending and undersaving tendencies. But once the pandemic hit, that all changed—because people were forced to stay at home due to lockdowns and restrictions, they ended up spending less money on non-essential goods and leisurely activities, allowing them to focus on paying off their debts and building their savings. In fact, as of March 2021, Canadians spent approximately $4,000 less in 2020 during the pandemic, according to the Bank of Canada.
Canadians took advantage of the circumstances to grow their TFSA and other investment accounts; however, some mistakes were still made. The biggest one involves a financial move that one may not think would have any major repercussions—contributing too much money. Those who have gotten into the swing of saving with their TFSA accounts may forget about the over-contribution rule, which could put them at risk of receiving a penalty.
Say you've already maxed out your TFSA room this year, but you've made a withdrawal from the account to make some big miscellaneous purchase, like a car. You cannot replace that withdrawn amount in the same year or else it will count as an over-contribution. To make up for the withdrawal, you would have to wait until January 1, 2022 to avoid any penalties.
Thankfully, the Canada Revenue Agency is aware that mistakes happen and, in some cases, they do give some room for error should an over-contribution be made. However, the CRA still has the final say and it's entirely up to them how they'd like to proceed with a particular case of over-contribution. With that in mind, it's important to keep track of your contributions for the year, as well as your max contribution room, so that you don't get caught off-guard with a penalty.
Additionally, Canadians with TFSA accounts should consider using them for more than just a cash savings pool. Given that Canadian stocks have skyrocketed over the past year, it would be worth considering tying one's TFSA account to some sort of investment. It would be a great shame to miss out on the current bull market!
