Here's some advice for the new Liberal government on how not to antagonize TFSA lovers.
The background here is the Liberal commitment to reverse this year's increase in the annual contribution limit for tax free savings accounts to $10,000 from $5,500. The party was clear about this, so no one should be surprised about a lower limit. Still, there's going to be a lot of angry savers and investors who feel they've taken a financial hit as a result of the lower limit. For the sake of clarity, fairness and calm, the best way for the new government to follow through on this promise would be to take these three easy steps.
1.) Reassure people as quickly as possible that the $10,000 limit previously announced for 2015 stands, and that the limit will fall back to $5,500 for 2016. Trying to lower the limit this year would create an administrative nightmare for investment firms and clients who jumped on the $10,000 limit when it was introduced in the spring budget. Imagine tens of thousands of people contacting their banks and investment firms all at once to withdraw $4,500 from their account. And what about the investment gains on that money – would they have to come out as well?
2.) Restore the inflation indexing that applied to the old $5,500 limit. The Conservatives eliminated inflation indexing when they bumped up the limit to $10,000. Restoring it would give people a sense of hope that they will have more room to save and invest tax-free over time.
3.) Move quickly. Governments make adjustments like changing the TFSA limit from time to time, but they typically do a rotten job of ensuring citizens understand what's happening. Over the years, I've noticed that people seem especially in the dark about when tax-related changes take effect. Just a day or two ago, I had an e-mail from a reader asking if the $10,000 TFSA limit was ever made official. In fact, people were able to start taking advantage of the higher limit within days of it being announced in the budget. However, some thought they needed to wait until the measure received approval in Parliament (this has already happened). It's now up to the Liberals to be perfectly clear how and when they will reduce that limit back to $5,500. Don't leave TFSA lovers to brood over how and when the axe will fall.