BY IG WEALTH MANAGEMENT / DECEMBER 2020

To take full advantage of the tax-deferred growth available when investing in a tax-free savings account (TFSA), many Canadians strive to maximize their TFSA contributions as early in the year as possible. However, while the goal with a TFSA should be to contribute as much as you can within the limits of your available contribution room, you also need to be mindful not to over-contribute. Putting more money in a calendar year than you’re allowed by law could result in penalties. The severity of which will depend on the circumstances of the over-contribution.

The Tax-Free Savings Account (TFSA) has become a highly popular savings vehicle since it first became available in 2009 – almost 15 million Canadians have opened one. Its appeal lies in its simplicity and flexibility:

• Any Canadian adult may deposit after-tax dollars up to their allowable limit.
• Money in the account can be invested in a wide array of financial products.
• Investment returns are all tax free, whether they are capital gains, interest or dividends.
• There are no TFSA withdrawal taxes or TFSA penalties for withdrawals.

There are some TFSA withdrawal rules, but they are easy to follow.

Taking money from your  TFSA

TFSA withdrawal rules allow you to take money out of your TFSA at any time, without penalties or tax consequences. The only rule here is that you may have to wait before re-contributing the withdrawn amount.

While there is no TFSA withdrawal limit, any money you take out of your TFSA will be added back to your contribution limit, but only after the start of the following calendar year (unless you still have contribution room left over).

For example:

• Leah turned 18 in 2019 and has accumulated $24,000 in contribution space for her TFSA.
• She has contributed $20,000 and withdrew $6,000 in 2022.
• She may still contribute $4,000 in the same year, because she had not previously maxed out her $24,000 limit.
• She may not contribute the $6,000 she withdrew until January 1, 2023.

This makes the TFSA far more flexible that an RRSP, where withdrawals are permanently subtracted from your contribution limit.

Funding retirement with TFSA  withdrawals

Taking money out of a TFSA for a down payment on a home purchase is a popular option, as is using the TFSA to save for a specific near-term need, such as a wedding or car purchase.

TFSA withdrawal rules and their tax-free status also makes them a valuable option for retirement planning, because withdrawals have no impact on income-tested benefits, such as Old Age Security (OAS).

Over the long term, a diligent TFSA investor may be able to build enough retirement savings to delay withdrawals from their RRSP or supplement their government benefits after depleting their RRSP.

Our Team can help you to maximize the benefits of a TFSA, depending on your unique circumstances. Call us to learn more or make an appointment here. 

^{Written and published by IG Wealth Management as a general source of information only, believed to be accurate as of the date of publishing. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on up to date withholding rules and rates and on your specific circumstances from an IG Wealth Management Consultant. Trademarks, including IG Wealth Management and IG Private Wealth Management are owned by IGM Financial Inc. and licensed to its subsidiary corporations.}