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How To Fix TFSA Over-Contributions

The introduction of the Tax-Free Savings Account (TFSA) broadened the options Canadians have when it comes to saving and investing. This account offers higher returns than a typical savings account — not to mention withdrawals are easy and cheap. There is, however, one limitation: it’s crucial you don’t over-contribute to your TFSA, otherwise, you’ll incur a penalty. On the flip side, the good news is that you can fix TFSA over-contributions.

How to fix TFSA over-contributions

Quick TFSA Catch Up

The federal government created the TFSA in 2009 to encourage Canadians to save. By design, the account would be easily accessible and generate tax-free income. The introduction of the TFSA gives consumers a powerful savings tool to help them reach their goals.

TFSAs are not just savings accounts either. While typical savings accounts let your money sit and accumulate interest until you’re ready to withdraw it, money placed in a TFSA is invested in mutual funds, stocks, and ETFs. As a result, your money grows at a faster rate (interest rates range from around 0.75% to 2.35%).

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How Do TFSA Contributions Work?

A TFSA works like any savings account. You set aside whatever amount of money you want (up to a government-set maximum) and you remove the money whenever you want, without penalty. The cash accrues interest while in the account. What sets TFSAs apart is that the interest typically subject to taxation in an unsheltered account is tax-free when you invest in a TFSA.

Taxes On TFSA Contributions

There is a tax on TFSA contributions, but there is no tax on any interest earned. Unlike a registered savings account, funds are withdrawn tax-free (as income tax is already paid on the money).

How To Avoid TFSA Over-Contributions

TFSAs are a great savings tool with very few limitations. However, as we mentioned before, there is one important limitation: how much money you can put into the account in any given year. When you over-contribute to a TFSA, you pay a penalty. So, understanding yearly TFSA limits is very important.

In a perfect world, you’d pack your account with as much money as possible, and reap the greatest benefit of the tax savings on the interest. In recent years, the annual maximums have varied from $5,000 all the way up to $10,000, so it’s a good idea to double-check your contribution limit with a TFSA calculator.

A quick FYI: If you’re automating your month/weekly contributions, make sure to keep the limit in mind when setting the amount.

Can You Lose TFSA Contribution Room?

The good news is that unused TFSA contribution room carries forward each year.

Never invested in a TFSA before 2021? You can make up for the lost time by contributing your maximum, up to $75,500.

What Is The TFSA Contribution Limit In 2021?

The TFSA limit for 2021 is staying at the same level as it has been since 2019 — $6,000.

What Is The TFSA Limit By Year?

With the exception of 2015, when the maximum contribution was spiked to $10,000, the most you can contribute hasn’t changed dramatically, year-over-year. Here’s a look at the TFSA contribution limits in the past decade:

2009–2012: $5,000

2013–2014: $5,500

2015: $10,000

2016–2018: $5,500

2019-2021: $6,000

What Is The TFSA Contribution Lifetime Limit?

There isn’t one! You can contribute up to that maximum year-over-year, and enjoy all of the benefits of your interest, dividends, and capital gains being protected from taxes.

Many people contribute a set amount to their TFSA throughout the year. Keeping an eye on this amount can help prevent over-contributions from happening. Make sure your TFSA earns money, instead of costing you money!

How Do Know If You Over-Contribute To A TFSA?

Don’t worry — the Canada Revenue Agency (CRA) will send a letter when you’ve gone over the maximum. The letter is in the form of an “excess amount” notice and will direct you to withdraw the funds. In addition, it might include a form to submit payment for the accrued tax penalty.

What Is The Penalty For TFSA Over-Contributions?

If you exceed your TFSA contribution limit, the amount that you’ve over-contributed is subject to a 1% per-month penalty. For example, if you over-contribute $1,000, you pay a penalty of $10 every month for as long as that excess sits in your TFSA. So if you hit the annual limit by August, and this $1,000 over-contribution stays in your account until the end of the year, you’ll pay $50 in penalties.

How Do You Fix A TFSA Over-Contribution?

Over-contributions happen all the time, especially since many people have multiple TFSAs for a variety of savings goals. They also tend to happen because while withdrawals increase your contribution room, it doesn’t apply to your TFSA right away. The extra room only starts on January 1st of the following year.

If it happens, for the most part, it isn’t a big deal. That doesn’t mean the money can sit there, though. You must act fast and remove it as soon as possible. Luckily, fixing an over-contribution is a relatively easy process:

  • Contact the financial institution and ask to withdraw the excess funds.
  • If you receive an overpayment form along with the notice of overpayment, send both back to the CRA as soon as possible.

That’s it! That being said, if you plan to appeal the overpayment notice, for whatever reason, you must send the CRA a notice outlining the case, providing your personal information, a detailed look at the situation, steps you’re taking to address it, and why there was an over-contribution in the first place. It could take a month or two to hear back, but if the CRA deems the overpayment to have been in error, they may reimburse the fee. It’s worth a shot if you can make the case! Mistakes can definitely happen.

Note: if you are appealing to the CRA, there are no guarantees it’ll be accepted. It’s wise to just pay the penalty, and if your appeal is successful, the CRA will just do a reversal. Ultimately, the key is making sure you removed the excess funds as soon as possible first.

What Are The TFSA Withdrawal Rules?

The TFSA withdrawal rules are simple. First off, there is no tax impact when withdrawing money from the account. Second, it can take 24 to 48 hours to make it into your bank account. Otherwise, it’s no different than withdrawing money from any other savings account.

Any amount of money you withdraw adds to your maximum contribution limit for the following year. For example, the limit this year and next is $6,000. If you invest the full amount, but then take out $500, then next year you have $6,500 in TFSA contribution room.

Managing TFSA Over-Contributions

TSFAs are designed to be an easy savings solution, with simple rules and lots of great benefits.

At the end of the day, TFSA over-contributions are easy to resolve and require little strategic forethought. They do, however, require management. If you decide to keep the money in the account and incur the associated penalty, just wait a year. The over-contribution remedies itself (depending on the size of the excess amount).

Ultimately, as long as you oversee your accounts and keep yourself abreast of the effects of over-contributions to a TFSA, you save in a manner that is comfortable and effective.

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