Guide to Withdrawing From a Tax-Free Savings Account

A Tax-Free Savings Account (TFSA) allows Canadian residents 18 and older to save money on a tax-free basis. If you need to take money from your account, you can make a tax-free savings withdrawal at any time. It sounds like an ideal way to boost your financial health and wealth, and it can be.

So let’s take a closer look at these accounts. There are some additional rules that apply to TFSA withdrawals and there are also limits on annual contributions. If you’re eligible to open a Tax-Free Savings Account, it’s helpful to understand how they work. To help you do that, we’ll delve into, among other topics,

•   What a Tax-Free Savings Account is

•   What is the contribution room on a TFSA

•   When and how you can withdraw from a Tax-Free Savings Account.

What Is a Tax-Free Savings Account?

A Tax-Free Savings Account or TFSA is a special type of savings account for Canadian residents. If you live in Canada, are 18 or older, and have a Social Insurance Number (SIN), you can open a TFSA to set aside money on a tax-free basis. Non-residents who have an SIN can also open a Tax-Free Savings Account but contributions are subject to a 1% tax each month they remain in the account.

TFSAs can be offered by banks, credit unions, insurance companies, and trust companies. A TFSA can be established as a deposit account, annuity contract, or arrangement in trust. You don’t need to have earned income to open and contribute to a TFSA.

A TFSA is not the same as an RRSP or Registered Retirement Savings Plan. The main difference between a TFSA vs. RRSP is tax treatment. RRSP contributions are tax-deductible; TFSA contributions are not. Additionally, withdrawals from an RRSP are taxable while a TFSA offers the advantage of tax-free savings withdrawals.

So when can you withdraw money from a tax-free savings account? The short answer is any time you like. But there are some rules to understand with regard to withdrawals from a TFSA and the contributions you’re allowed to make each year.

What Is the TFSA Contribution Room?

The TFSA contribution room is the maximum amount you can contribute to your account for the year. All contributions you make during the year, including replacement or re-contribution of withdrawals made from your account, are factored in when calculating your contribution room.

There are a few exceptions, however. For instance, none of the following count toward your contribution room:

•   Qualifying transfers

•   Exempt contributions

•   Specified distributions

So why does the contribution room matter? One reason: penalties. If you go over your available TFSA contribution room at any time during the year, you’ll have to pay a tax penalty. It will equal 1% of the highest excess amount in the month, and it’s calculated for each month excess contributions remain in your account.

TFSA Contribution Limits

The Canada Revenue Agency establishes annual contribution limits for TFSAs. These limits are periodically adjusted for inflation. For 2022, the TFSA contribution limit is $6,000. This is similar to the maximum annual contribution limit for U.S.-based savers who open a traditional or Roth IRA.

One thing to know about TFSAs is that the contribution room accumulates over time, even if you haven’t opened an account yet. This means if you didn’t contribute for a certain year, you may be able to catch up and put in funds later.

Here’s how contribution room has accumulated since these accounts were introduced in 2009:

•   From 2009 to 2012, the annual TFSA dollar limit was $5,000

•   For 2013 and 2014, the annual TFSA dollar limit was $5,500

•   In 2015, the annual TFSA dollar limit was $10,000

•   From 2016 to 2018, the annual TFSA dollar limit was $5,500

•   For years 2019 to 2021, the annual TFSA dollar limit was $6,000

As of 2022, the total lifetime contribution allowed to a TFSA was $81,500.

Earnings on investments do not affect your contribution room. So if your investments go up in value over time, that wouldn’t reduce the amount you’re able to contribute to a TFSA.

Recommended: Is There Such a Thing as a Safe Investment?

How to Calculate Your TFSA Contribution Room

All of these numbers and years may sound a little confusing at times. But there’s help: If you need to see your TFSA contribution room, the Canada Revenue Agency allows you to do so by:

•   Logging in to My Account

•   Using the MyCRA mobile app

•   Contacting your authorized representative

•   Calling the Tax Information Phone Service (TIPS) at 1-800-267-6999

You can also calculate your TFSA contribution room yourself. This is something you may want to do, as contributions you’ve made for the current year may not be included in the contribution room figure available through My Account, the mobile app, or by phone.

The Canada Revenue Agency publishes a worksheet you can download to calculate your contribution. To make the calculation, you’ll need to know three things:

•   Unused TFSA contribution room from previous years (that is, if you did not max out your contribution, by how much?)

•   Withdrawals made from a TFSA the previous year

•   Annual TFSA contribution limit

With TFSAs, you have the ability to replace withdrawals from previous years and have them count toward your contribution room.

So let’s say you opened a TFSA in 2009 and maxed out annual contributions through the end of 2019. But in 2020, you only contribute $1,000, leaving a $5,000 unused contribution. Meanwhile, you withdraw $3,000. At the beginning of 2021, your contribution room would be $15,000 ($6,000 for the 2021 annual limit + $3,000 for the withdrawal + $5,000 for unused contributions in 2020).

What If I Can’t Contribute the Maximum Contribution Room Amount?

All this talk of maximum contribution limits for TFSAs may have you wondering, “What if I can’t put that much into my account?” It’s a common situation. If you’re not financially able to max out your contribution room for any given year, you can carry forward unused contributions to the next year. This allows you to make larger contributions in tax years where you might have more funds available.

That’s an advantage compared to different types of retirement plans or other tax-advantaged savings accounts. If you’re saving in a Roth or traditional IRA, for example, you’d only be able to save up to $6,000 per year. With a TFSA or even an RRSP, on the other hand, the contribution room is cumulative. That means you don’t have to miss out any opportunities to max out those plans.

Recommended: Important Retirement Contribution Limits

Current TFSA Withdrawal Rules

When can you withdraw from a Tax-Free Savings Account? TFSA withdrawal rules offer flexibility, in that your money is accessible to you when you need it. Withdrawing money from your TFSA doesn’t lower the total amount of contributions you’ve already made from the current year. But withdrawals are added back to your contribution room for the following year.

So again, say you have $40,000 in your TFSA and you withdrew $5,000 at the end of 2021. You could take that $5,000 and add it to the $6,000 contribution limit for 2022 and contribute a total of $11,000 for the year. That figure might also be increased by any unused contribution amounts you have from previous years.

If you’d like to replace or re-contribute withdrawals in the same year, you can only do that if you have an available TFSA contribution room. If you don’t have available contribution room but you replace contributions anyway, then you’ll be subject to that 1% over-contribution tax penalty we mentioned previously.

When Can I Withdraw Money From My TFSA?

You might wonder, “Can I withdraw money from a Tax-Free Savings Account at any time?” The answer is a yes, according to the Canada Revenue Agency, which can lead to a big sigh of relief in some situations. This would be a tax-free savings withdrawal. So, for example, you might withdraw money from a TFSA, without being taxed, in order to:

•   Pay college expenses

•   Put a down payment on a home

•   Make repairs or renovations to a home you already own

•   Buy a car

•   Start a business

The only exception is if you’ve invested some or all of your TFSA money in products that are subject to lock-in rules. That includes GICs or Guaranteed Investment Certificates. A GIC is roughly the Canadian equivalent of a certificate of deposit (CD). They both are financial products in which you agree to leave your money in the investment for a set period of time while earning interest.

How Much Can I Withdraw From My TFSA?

There are no limits on how much you can withdraw from a TFSA at any given time. Just remember that if you want to replace those contributions or re-contribute them for the year, your ability to do so may be limited by what you’ve already deposited for the year.

For that reason, it may be a good idea to keep a running tally of how much you’ve contributed for the year and any withdrawals you make. This can help you avoid a tax penalty for making over-contributions. You can also see whether it’s possible to re-contribute withdrawals in the current tax year versus having to wait until the next year.

How Much Can I Save With a TFSA?

The amount you can save with a TFSA is determined by your contribution room, as explained earlier. If you’re opening a TFSA in 2022, then you’d be able to contribute $6,000 for the year. TFSA rules allow savers to accumulate contribution room beginning at age 18.

Let’s consider how age impacts saving in a TFSA. Say you were 18 in 2009 when TFSAs were introduced. You could open one of these accounts today and still be able to make contributions for all the years you’ve missed. On the other hand, if you turned 18 in 2019, then you’d only have accumulated contribution room beginning with that year.

TFSA Tax Withdrawal Implications

TFSA withdrawals are tax-free; there are no tax implications for taking money from your account. That’s why they are considered a very valuable savings opportunity. As noted, the only real tax penalty you have to worry about is the 1% penalty that applies if you make contributions over your available contribution room for the year.

TSFAs allow the money in your account to grow tax-free until you need to withdraw it. So you could open a TFSA at age 18 and deposit money up to your contribution room each year until age 65 and not pay a dime in taxes on any of it. For that reason, it can be beneficial to open a TFSA alongside an RRSP to save for the future.

Things to Consider When Contributing to and Withdrawing from TFSAs

Now that you understand when can you withdraw from your Tax-Free Savings Account balance, it’s helpful to consider when it makes sense to do so. Here are some tips for starting a retirement fund using a TFSA:

•   Contributions are not tax-deductible, nor are capital losses

•   Withdrawals are tax-free

•   Over-contributions can trigger a 1% tax penalty

•   Withdrawals can be replaced in the same year only if you have available contribution room

•   Unused contribution room can be carried forward to future years

•   Withdrawals can be added back to your contribution limit for the next year

Also, note that you can have more than one TFSA. But the amount you can contribute to all your TFSAs is aggregate and determined by your annual contribution room.

The Takeaway

Opening a TFSA can make good financial sense if you’re looking for a tax-advantaged way to save and invest money for the future. These Tax-Free Savings Accounts let you withdraw funds without paying any taxes on the money, which can be a real plus. But before starting a TFSA, it’s important to understand the rules for making contributions and when exactly you can withdraw money from your account. This intel will help keep your savings on track, today and tomorrow.

Of course, a TFSA isn’t the only way to save. You could also open an online banking account with SoFi. Our Checking and Savings, when opened with direct deposit, help make the most of your money. You’ll earn a highly competitive APY to boost your balance, and there are no account fees to eat into your funds.

Better banking is here with up to 4.00% APY on SoFi Checking and Savings.

FAQ

Can I withdraw money from my tax-free savings account?

You can withdraw money from a Tax-Free Savings Account at any time, tax-free. Withdrawals can be added back to your TFSA contribution room for the next tax year.

What are the rules for withdrawing from a TFSA?

Withdrawals can be made at any time from a TFSA, and those withdrawals are tax-free. You can replace or re-contribute withdrawals in the same tax year, only if you have available contribution room. Any withdrawals that are not replaced in the same tax year can be carried forward to the next year.

What happens if you lose money in your TFSA?

When you put money in a TFSA, you have the option to invest it in different securities. The value of your TFSA is linked to the value of those investments. If you lose money in your TFSA because the value of your investments declines, you cannot deduct those capital losses on your taxes.

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