TFSA Withdrawal Rules: How to Avoid Getting Dinged

When the TFSA first came out in 2009, there was a lot of confusion about what the TFSA is (and there probably still is).  Other than the fact that the TFSA is (mis)labelled as a “Tax Free Savings Account” when it should really be utilized to its full potential as a Tax Free Investment Account, there was a lot of confusion initially about when a TFSA withdrawal is done and how much you can contribute if you withdraw from the TFSA.

Related: Step by Step Guide on How to Invest your TFSA with Questrade

I made that mistake too and was shocked when I got an invoice from the government for a few hundred dollars with additional penalty if I was late each month for payment.  This was a few years ago now, and thankfully there was a lot of confusion from other Canadians as well and so the government waived it since everyone else was making the same mistake (I did have to pay first and it was reimbursed via a cheque, from what I remember).

Here’s how to not get dinged like I almost did.

Withdrawing from TFSA

What is a TFSA withdrawal?  The beauty of the TFSA is that you can withdraw money from the TFSA any time you want for anything you want.  If you want to take your money out of your TFSA for a down payment (which is what I did), or for a wedding, or for a sabbatical, you can.

via GIPHY

Unlike the RRSP, you won’t have to pay taxes when you withdraw from the TFSA, because you already paid taxes on the money you put into your TFSA (remember, you contribute with your after tax dollars).  When you withdraw funds from your TFSA it doesn’t take away the total of amount contributions you have already made that year.

Related: RRSP vs TFSA: Which One to Invest in First?

Straight from the horse’s mouth (Canada.ca):

Withdrawing funds from your TFSA does not reduce the total amount of contributions you have already made for the year.

Recap of The TFSA Limit

The TFSA contribution limit has changed quite often depending on the government in power, and dependent on a number of other factors.  It can be hard to keep track of what the TFSA limit is for the year, but here is a recap of the TFSA limit.

To check how much you have for your personal situation (e.g. if you have not contributed religiously January 1 of every year the max TFSA) you can log into My CRA and you will be able to find out how much TFSA contribution room you have, but it might not be 100% updated for the current year (for example, I had already contributed but it still showed I had $6000 contribution room for t his year).  It’s not “real time” updated, lol, but it’s pretty accurate.

Logging into My CRA is a good solution for people who have made contributions and then withdrawn, and then made contributions again, and then withdrew another amount, but then lost track of their total contribution limit. I made a lot of small contributions and then lost track of my total contributions for the year.  This is what I did and My CRA wasn’t in place yet, it would have been helpful to have!

Year                                                          TFSA contribution limit

2019	$6,000
2018	$5,500
2017	$5,500
2016	$5,500
2015	$10,000
2014	$5,500
2013	$5,500
2012	$5,000
2011	$5,000
2010	$5,000
2009	$5,000

As a reminder, if you had turned 18 in 2009 (that’s the minimum age to be eligible to have a Tax Free Savings Account), the total life time amount (if you add all the numbers up above), is $85,500 for 2022.

 

TFSA Withdrawal Rules

Now, you can withdraw whenever you want, and the beauty of it is, that the amount you want to withdraw does not reduce the total amount of contributions you have made for the year.  However, there is one caveat.  If you want to recontribute that amount, you have to wait until the following year, January 1, to recontribute.  Otherwise, you will have to pay taxes on excess TFSA contribution.

For example, if I had $75,000 in my TFSA and I have not contributed for the 2019 year (which is $6000), and I withdraw $25,000 from my TFSA in 2019 to buy a car.

• In 2019 my contribution limit is $6000.
• In 2020, my contribution limit would be $25,000 + $6000 (from unused contribution in 2019) and $6000 (2020 contribution limit provided there’s no changes)
• Therefore on January 1, 2020 the 2020 limit is $37,000 for my situation

However, let’s look at another situation, if I had $75,000 in my TFSA and I have already contributed for 2019 year (the max, $6000), and I withdraw $25,000 from my TFSA in 2019 to buy a car:

• In 2019 my contribution limit is $0 (since I already contributed $6000)
• In 2020, my contribution limit would be $25,000 + $6000 (2020 contribution limit provided there’s no changes with government)
• Therefore on January 1, 2020 the limit would be $31,000 for my own situation

Is There a Penalty for Withdrawing from TFSA?

What are the TFSA over contribution taxes and fees that you will have to pay if you put the money back in the same year by mistake?  (You know, like what I did by mistake).

The amount is 1% of your over contribution per month in excess.  For example, if you over contributed by $2000, for 6 months, you’ll get $20 a month penalty, or about $120 for 6 months (and counting if you don’t remove the over contribution when you get the letter). 

For me, it took a while to receive the letter (I had no clue I was accruing this penalty for the six months), but this might have changed in recent years.

You’ll get a TFSA excess amount letter (like I did) with the amount you owe.  You’ll feel panic but don’t worry, there’s steps you can take to try and reverse it.  First you have to remove the excess TFSA contribution amount. 

Then you have to write a letter.  It takes months though.  The government can waive or cancel the TFSA taxes but you’ll have to write a letter and explain your situation.  Here’s some more information on who to write to if TFSA over contribution happens to you.

Hope this was a helpful review of the TFSA withdrawal fees and rules so that you don’t get dinged like I did.  However, if you do, the friendly folks were pretty helpful and understanding and after some correspondence, reversed the TFSA penalty that I had to pay, thankfully.

You may also be interested in:

• RRSP Contribution Deadline
• RESP Contribute LImit

Have you ever over contributed to your TFSA like I have? 

Have you ever tried withdrawing from your TFSA?