TFSA Contribution Limits and Withdrawal Rules

The beauty of the TFSA lies in its flexibility. You don’t have to contribute the maximum every year, you’re free to contribute as much of your limit as you want, or can afford, and the residual contribution room will carry forward to be available in future years. In addition, withdrawing from the TFSA is quite simple. Regardless of the investment vehicle you utilized for the funds in the account, any withdrawals from the TFSA are completely tax-free (with the exception of dividends from U.S. stocks). On top of that, you never lose the contribution room. You just have to wait until the following calendar year before you can put the funds back into the account.

The one caveat to investing in a TFSA is that there are rules regarding contribution limits and withdrawals which we will discuss in detail below. 

However, if you’re at least 18, living in Canada, and are trying to figure out how to build wealth – read on!

Contributing to a Tax-Free Savings Account (TFSA)

The CRA has a record of your TFSA.  This is why the account is referred to as being registered.  The government likes to track how many billions in income tax revenue they are missing out on because of Canadians that take advantage of this account.   That being said, if you are curious about your TFSA room, you can log in or call CRA to give your current year’s contribution room.  Be aware that the CRA only gets reporting at the end of each calendar year, so if you had $88,000 in contribution room to end 2022 and made subsequent contributions in 2023, the CRA will not have noted that.

How Much Can I Contribute to my TFSA?

This amount is not determined by income, but merely, by your age and your status as a resident of Canada.  Although you can still take advantage of a TFSA as a non-resident, your contribution room does not grow each year you’re not in Canada.

How Do I know what my yearly TFSA contribution limit is?

That seems to change annually, but from 2009 to 2012 it was $  5,000 a year.  From 2013 to 2018, the amount went up to $5500 a year (except for in 2015, when the amount was $10,000 one time).  Then it was $6000 a year from 2019 to 2022, and finally, in 2023, the amount has increased to $6500.   As long as you are at least 18 and reside in Canada, your yearly limit is the same.  If you were at least 18 in 2009 and have resided in Canada ever since, and have not used a TFSA ever before then your total limit is $88,000 in 2023.

What happens if I can’t contribute the maximum amount?

As mentioned earlier, you don’t lose the contribution room by not using the account.   The TFSA contribution room will always be there for when you can fund it.  And unlike an RRSP,  once you do use the contribution room, any amount you withdraw can be re-contributed into the TFSA the following calendar year.   Keep reading to find out what a game-changer this rule can be.

What happens if I contribute more than my limit?

If you happen to contribute more money than allowed, the CRA charges a monthly penalty for as long as that extra contribution is in the account.   The fee is 1% a month on the excess contribution.  For example, say you put in $6,500 too much on October 1^st, 2022.  You would be charged $65 in October, $65 in November, and $65 in December.  In January, your new limit would have increased by $6500, so you’d no longer be in a situation where you’ve over-contributed.   

Can I contribute to my spouse’s TFSA?

One of the most effective income-splitting strategies is to contribute to a spouse’s TFSA.  If you simply give the cash to your spouse to invest, the income earned on that investment is actually attributed back to you.  However, there are no attribution rules if you gift money to your spouse to fund their TFSA.  Plus, any investment income or growth that is earned within that TFSA, is tax-free anyway.

Withdrawing from a Tax-Free Savings Account (TFSA)

There are no fees and no tax implications for withdrawing from a TFSA.  However, there are key themes to be aware of which we will discuss below:

When can I withdraw money from my TFSA?

You can withdraw funds from your TFSA at any time.  Ideally, nearer to the end of the year is preferable as you aren’t able to re-contribute the amount withdrawn until the next calendar year.  You can however add funds to your TFSA after you’ve made a withdrawal if you had not maxed your total contribution yet.  For example, if you have $88,000 in room, but only $70,000 has been contributed, you can add $18,000 at any time regardless of how much you withdrew in that same calendar year.  

How much can I withdraw?

Any amount can be withdrawn, assuming you have that in the account.  A problem I’ve seen is that let’s say you contribute $50,000 to invest in some stocks.  Today the stocks are only worth $40,000.  The market value of $40,000 is all that you can withdraw by selling the stocks at a loss.  Not only that but by withdrawing you’ve effectively reduced your contribution room by $10,000 and are not able to claim the loss on your tax return.

After I withdraw from my TFSA, is the contribution room lost?

Say you contributed the maximum to your TFSA which happens to be $88,000.  You then invest that $88,000 within your TFSA and do quite well. That $88,000 TFSA is now worth $300,000 and you decide to withdraw the full amount. Well, as noted, the Income Tax Act states that any withdrawal can be re-contributed to your TFSA in the following year. So if you withdrew $300,000, you would essentially have $306,500 in contribution room next year (the $300,000 withdrawal plus the new year’s additional room).

Do I have to pay income tax on my TFSA withdrawals?

There is no income tax owing from making a withdrawal from your TFSA.  In a regular non-registered investment account, anything you make or earn is subject to taxation.  This applies to interest earned from savings vehicles, dividends paid from publicly traded stocks, distributions received from mutual funds or ETFs, and realized capital gains (which is when you sell something worth more than what you paid).   This is however one instance in which tax will be paid on certain income.  The US does not recognize the TFSA.  Therefore, dividends received from US-sourced stocks are subject to a 15% withholding tax payment. You do not need to report this income on your tax return, or file with the IRS.

How much can I make in a TFSA?

This is largely determined by the rate of return you plan to achieve within your TFSA account.  Using a calculator with a reasonable rate of return can give you a pretty good estimate as to what you can expect to make. 

Here’s an example, say you started your TFSA tomorrow and deposited your maximum limit of $88,000.   You decide to commit to maxing out your TSFA every year for 25 years and expect to earn a rate of 8% (the average return in the S&P 500 index).  After 25 years, your TFSA would be worth over a million dollars.   A million dollars will not only continue to generate tax-free income within the account, but the withdrawals are free from any tax and will not affect any income-tested government subsidies like OAS and GIS! 

Click on the link HERE to build your own scenario.

How do I open a TFSA?

Any of your local financial institutions can help facilitate the opening of a TFSA.  If you are concerned about your current financial situation and don’t seem to be getting the right advice, consider professional guidance, tailored advice, and complete hand-holding of your financial affairs, by working with a wealth management team like the Watkins Group that can do it all for you.

Conclusion

Not only is this account flexible in terms of using as an emergency savings account for withdrawals and contributions, but if used effectively, can be an extremely brilliant tool for building tax-free wealth over time.   The onus is on the account holder to make sure investments within the TFSA are safe enough that losses won’t deplete the precious contribution room, but instruments that can grow enough to really impact net worth and bring you that much closer to your financial goals over time.