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I have just finished reading Gordon Pape's new book on Tax-Free Savings Accounts in order to get a good handle on what I can do with it. In one chapter, he discusses using a TFSA to invest in stocks. He uses the example of investing $5000 in year 1 and $5000 at the start of year 2. Assuming the markets come racing back, that $10 000 would double by the end of year 2, leaving the investor with $20 000 in the account. The $20 000 could then be withdrawn to use as a downpayment for a house or another investment. By the start of year 3, you would be able to contribute the $20 000 + $5000 for the new year. So far everything makes sense to me.

But my question is... theoretically, what if the market drops? At the end of year 2, the $10 000 investment has dropped to $7500. If the person has to take that $7500 out, what would their contribution limit be for the start of year 3?

The way I see it, they would be able to contribute $12 500 ($7500 + $5000). Am I right?
 
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