What withdrawals mean for your TFSA

Moving money in and out of your TFSA affects your contribution limit and over-contributions can mean charges from the government.

There’s a maximum amount that you can contribute to a Tax-Free Savings Account (TFSA) each year. It can change from one year to the next but it’s generally between $5,000 and $10,000.

The question here is, what happens to this contribution limit if you make a contribution and then withdraw part or all of it? The answer: You lose that contribution room for this year, but you’ll get it back next year. This means regularly moving money in and out of your TFSA can quickly eat up your contribution room for the year.

Here’s an example:

Say your contribution limit for the year is $5,500. You deposit the full $5,500 into your TFSA on January 1st, and then on March 1st you withdraw $3,000. You haven’t freed up $3,000 in contribution room with this withdrawal. According to the government you’ve still contributed the full $5,500 for the year. If you make another contribution to your TFSA this year, you’ll be charged a penalty for over-contributing. It’s a 1% charge on the amount over-contributed for each month it stays in your TFSA.

Don’t worry, you haven’t lost that contribution room permanently. You’ll get it back at the start of the next calendar year, when you receive that year’s additional contribution room.

If you’re moving money from one TFSA to another, don’t make the mistake of withdrawing the money and re-contributing it to your second TFSA. Instead, call our Contact Centre at 1.866.863.6237. They can transfer the money directly with no effect on your contribution limit.