TFSA Withdrawal Rules

TFSAs are lauded as one of the best savings vehicles for Canadians, thanks to their flexibility. However, while they may offer more opportunities for Canadians to save for various goals, they are not without their rules. Here’s what you need to know about TFSA withdrawal rules to maximize your account and avoid any penalties. 

What is a TFSA?

The Tax Free Savings Account (TFSA) program was created by the Government of Canada in 2009 as a way for adult Canadians (age 18 and above) who hold a valid social insurance number (SIN) to save money, tax-free, throughout the course of their life. Unlike a registered retirement savings plan (RRSP), a TFSA is not considered a taxable income, even when you withdraw it. 

Thanks to its flexibility and the fact that it is tax-free, a TFSA can be used for all kinds of savings goals. Some will use it to save for the down payment on a house, while others will keep it as an emergency fund. You can also use it to save for smaller goals like a vacation or a car purchase or long-term goals like retirement. There are tons of possibilities for this account. 

Every year, the government sets annual TFSA contribution limits, which are the maximum contributions of money that an individual can put into their TFSA account. Your TFSA contribution room starts the year in which you turn 18 and will accumulate every year after that. So, if you can’t deposit the full amount in previous years, then your unused TFSA contribution room is carried over to the following year(s). However, you cannot over-contribute, or you will have to pay a penalty tax.

You can read the in-depth guide to TFSAs here.

TFSA withdrawal rules

One of the best features of TFSA accounts is that the withdrawal rules are incredibly flexible. You can generally withdraw at any time without having to pay any taxes. You also don’t have to worry about them impacting any benefit programs like old age security (OAS), employment insurance (EI), or guaranteed income supplement (GIS). Plus, you don’t lose your contribution room. 

For example, say you started your TFSA when you turned 18. When you turn 25, you pull out $3,000 of your money to put towards buying a car. You haven’t lost the room for that $3,000. You can recontribute that money, but you need to do so correctly. 

TFSA recontribution rules

Recontributing money to a TFSA can be tricky and is one of the most common mistakes Canadians make with their TFSAs. While you can withdraw from your TFSA as needed and replace it, you will have to wait until the following year to replace those funds. Otherwise, it will be considered as going over your annual TFSA dollar limit. 

So to stick to our car example,

Say in January of 2023 you contributed the maximum amount you could for the calendar year and all previous years. In this case, $6500. Then, in April, you need extra cash to buy a car, so you withdraw $3000. But come December, you have saved another $3,000. You can’t re-deposit that $3,000 within this calendar year. You’ve already maxed out your contribution room and doing so will register as over-contribution and result in a fee.

You will have to wait until the next calendar year (in this case, 2024) when your contribution room resets. At this point, you can recontribute that $3,000 plus the new maximum amount for the calendar year.

There is one exception to this rule. Let’s say you didn’t max out your TFSA in one of your previous years and you still have $5,000 in contribution space. You could contribute the $3,000 you saved up by December into your TFSA as it would just be considered a regular contribution. Come 2024, you’d get your new contribution room, the $3,000 back which you withdrew in 2023, plus any room you haven’t used yet.

TFSA transfers

Other rules to be aware of are those surrounding TFSA transfers. Throughout your life, you may want to change how you invest your TFSA or even parts of your TFSA. For example, for short-term goals, you may want to put your money into a high interest savings account or guaranteed investment certificates where it is relatively safe. But for long-term goals, you are willing to take more risks and invest in exchange-traded funds.

This might mean you need to shuffle your money around and transfer your TFSA to another financial institution. But, remember, if you withdraw the money, you have to wait until the next calendar year to replace it. 

So, what happens?

You ask the financial institution to do it. Get in touch with a financial advisor, and they can complete the transfer for you without triggering any official withdrawals. There may be a fee associated with this, but the financial institution will often cover that as well. Here’s a detailed guide on how to transfer your TFSA to another financial institution.

TFSA Contribution limit

Since TFSAs first came about in 2009, the current maximum contribution room is $88,000 ($95,000 come 2024). Remember, you can only contribute once you start to turn 18, which means you would need to be 18 or older in 2009 to have access to a maximum of $88,000. 

The contribution maximum has fluctuated over the years. These are the current contribution limits.

• 2009-2012: $5,000
• 2013 and 2014: $5,500
• 2015: $10,000
• 2016-2018: $5,500 
• 2019-2022: $6,000
• 2023: $6,500
• 2024: $7,000

Where to check TFSA contribution room

If you log into your MyCRA account, you will be able to find details about your TFSA contribution room. However, it’s not always accurate. Beside the unused contribution room number, you will notice a highlighted yellow box that says ‘important information.’ This basically indicates that the number listed may not be current, is only reported based on the year before, and does not include any transactions from the current annual year.

For this reason, it’s best to keep track of your contributions yourself so you can maximize your deposits without having to worry about over-contributing and facing any penalties.