How To Fix TFSA Over-Contributions

There are many different types of savings tools you can take advantage of when setting aside money for a rainy day. The introduction of the Tax-Free Savings Account (TFSA) — a newer type of savings account — broadens those options. It offers higher returns than a typical savings account. And withdrawals are easy and cheap. However, there is one limitation — you have to make sure you don’t over-contribute to your TFSA, and incur a penalty. But the good news is, you can fix TFSA over-contribution, and we’ll tell you how.

How to fix TFSA over-contributions

Quick TFSA Catch Up

Back in 2008, the federal government announced the creation of a TFSA. It’s meant to encourage Canadians to save, with funds that are easily accessible and generate tax-free income. The introduction of the TFSA gives consumers a powerful savings tool to help them reach their savings goals.

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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 it apart is that the interest that is 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, you withdraw funds 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, 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 pack your account with as much money as possible, and reap the greatest benefit of the tax savings on the interest. The annual maximums vary from $5,000 per annum, all the way up to $10,000. So it’s a good idea to double-check your contribution limit with a TFSA calculator.

Can You Lose TFSA Contribution Room?

The good news is that unused TFSA contribution room carries forward each year (and this is one way to actually fix TFSA over-contributions, which is outlined in detail below). If you have not yet invested in a TFSA prior to 2019, make up for the lost time by contributing the maximum TFSA contribution, up to $63,500.

What Is The TFSA Contribution Limit In 2020?

The TFSA limit for 2020 holds firm at $6,000. The allowance for a first-time contribution, however, rises to $69,500.

What Is The TFSA Limit By Year?

With the exception of a one-time boost to a $10,000-maximum contribution, the most you can contribute hasn’t changed much year over year:

2009–2012: $5,000

2013–2014: $5,500

2015: $10,000

2016–2018: $5,500

2019: $6,000

What Is The TFSA Contribution Lifetime Limit?

There isn’t one! That’s one of the amazing things about a TFSA. The yearly limits are just that – yearly limits. You can contribute up to that maximum year over year over year, and enjoy all of the benefits of your interest, dividends and capital gains that are protected from taxes.

There is such a thing as ‘too much.’ Over-contributing to a TFSA means incurring a penalty. But as mentioned, you can easily fix TFSA over-contributions.

What Happens When To TFSA Over-Contributions?

If you don’t follow your TFSA contribution levels closely, you can end up having to fix over-contributions. And this means you pay a penalty. Many people contribute a set amount to their TFSA throughout the year. So it’s important to keep an eye on this amount to avoid over-contributions from happening. Make sure the 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) sends you a letter when there is a TFSA over-contribution. The letter is in the form of an “excess amount” notice. The notice insists you 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, that excess amount is subject to a 1% per-month penalty tax. So, for example, if you over-contribute $1,000 in the year, you pay a penalty of $10 every month for as long as that excess sits in your TFSA.

How Do You Fix A TFSA Over-Contribution?

Over-contributions happen all the time. It’s not a big deal if it happens. But that doesn’t mean the money can sit there. You must remove it immediately. Luckily, fixing an over-contribution is a relatively easy process:

  • Contact the financial institution and ask to withdraw the 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’s all! That being said, if you plan to appeal the overpayment notice, for whatever reason, you must send the CRA a notice outlining the case. If the CRA deems the overpayment to have been in error, they may reimburse the fee. It’s worth a shot!

Using Carry-Forward Room to Fix TFSA Over-Contributions

One of the great things about the TFSA is the flexibility it offers. And that flexibility is not just with withdrawals, but also for carrying over unused room. If you don’t use your entire allowable contribution room in the current year, that contribution room carries forward to the next calendar year.

And, if you over-contribute to your TFSA, time can actually help fix the situation. That’s because the amount gets absorbed the following year, and is simply taken from the following year’s allowance.

For example, let’s say you have $5,000 of allowable contribution room in 2020, and $5,000 of allowable contribution in 2021. But you contribute $6,000 in 2020. If that money stays in the account, you pay that 1% tax for the duration of 2020. But, when 2021 rolls around, you have $4,000 in contribution room (instead of the $5,000 you would have otherwise had) and the penalty ceases.

What Are The TFSA Withdrawal Rules?

The TFSA withdrawal rules are simple. There is no tax impact when withdrawing money from the account. It can take 24 to 48 hours to make it into your bank account. But it’s otherwise no different than withdrawing money from any other savings account.

Any amount of money you withdraw adds onto your maximum contribution limit for the following year. So, for example, say the limit this year and next is $6,000. And say you invest $6,000, but then take out $500. Well, 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. But they do have one limitation — over-contributions.

But 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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