Tax-Free Savings Accounts, or TFSAs for short, are powerful financial tools available to Canadians. Those who have access to these accounts typically make routine contributions each year. Withdrawing money from TFSA accounts may become necessary if you have an unexpected expense. Or maybe you want to invest in something, like a car purchase, education, or downpayment on a home. Luckily, withdrawing money from TFSA accounts is easy – and there’s no penalty for doing so. In this article, we’ll explore how to withdraw money from a TFSA and what you need to know before you complete the transaction.
Table of contents
- What is a TFSA?
- Can I withdraw money from my TFSA?
- TFSA Withdrawals: Frequently asked questions
What is a TFSA?
The Tax-Free Savings Account (TFSA) program began in 2009 as a way to motivate Canadians to set aside money throughout their lifetime. The tax-free incentive allows individuals to earn interest, dividends and capital gains on their investments without taxation. TFSAs are registered accounts meaning they’re registered with the Canada Revenue Agency and subject to special rules.
Special rules: contributions and withdrawals
Since TFSAs are special accounts, they come with special rules. The rules surround TFSA contribution limits and withdrawals. Here’s what you need to know:
|Each year, a maximum contribution limit is set by the CRA. The amount is cumulative. You cannot exceed your contribution limit otherwise you will face penalties.||Withdrawals can be made at any time without tax consequences.|
|If you make a withdrawal, the contribution room is added back at the beginning of the following year, not immediately.||Withdrawing from a TFSA does not eliminate, reduce or change the total contribution room available to you.|
|Only the account holder can make contributions to a TFSA.||Only the account holder can make withdrawals from a TFSA.|
So there you have it! These are the important things you need to know about contributions and withdrawals from your TFSA. Just remember to stay within the guidelines and you won’t have any difficulties.
Related Reading: How to Fix TFSA Over-Contributions
Taxation: What happens if I withdraw money from my TFSA?
The beauty of a TFSA is that it’s incredibly flexible – you can withdraw money at any time, for any reason, and there are no penalties. Only in some circumstances will there be financial implications to a TFSA withdrawal. The tax consequences most commonly arise when people try to re-contribute the amount they withdrew in the same year and they have maxed out their contribution room. Let’s take a look at an example below to demonstrate.
Stella’s total contribution room is $34,500. She has maxed out her contribution room as of December 2021. In January 2022, her car broke down due to the harsh Canadian winters and she withdrew $2,500 from her TFSA to cover the repairs. Her new contribution limit in her TFSA is $32,000. Several months later in November 2022, Stella receives a $3,000 bonus at work and decides to replenish the $2,500 she took out of her TFSA. Shortly after, Stella receives a notice from the CRA that she’s been charged a 1% penalty on $2,500 in her TFSA.
In this example, the replenished $2,500 would be an over-contribution to her TFSA. This is because her new contribution limit was $32,000 after the withdrawal. The CRA adds back the withdrawals at the beginning of the next tax year, which in this case would be in January 2023. In other words, when you make a TFSA withdrawal and have maxed out your contribution room, you cannot recontribute the removed amount until a new calendar year begins. Instead, Stella should keep the $2,500 from her bonus in a savings account until January 2023. Then, Stella can re-contribute the amount without tax consequences.
The only other time you will be subject to the 1% tax penalty is if you contribute to your TFSA while deemed a non-resident of Canada. In addition, you may face tax consequences if your TFSA holds a prohibited or non-qualified investment. The taxation is much higher under these circumstances. You will be required to pay 50% tax on the fair market value of the investment in question.
So there you have it! Withdrawing money from a TFSA isn’t complicated, but there are a few things to keep in mind to avoid any surprises during tax season.
Can I withdraw money from my TFSA?
Any TFSA account holder can withdraw money at any time, for any reason. There are no tax consequences to do so, as we saw above. So the answer is yes!
However, your TFSA withdrawal may be limited to the types of investments you hold in your account. For example, if you have funds locked into a GIC, you cannot withdraw those funds until the GIC has matured. Or, maybe the funds in your TFSA are locked into stock investments. In this case, you may incur fees to sell the investments to access the cash. In addition, it can take several days for a stock transaction to settle.
How to make a withdrawal from TFSA
Ready to make a withdrawal from your TFSA? There are a few different ways to withdraw money from a TFSA:
- You can make a withdrawal in person at a bank or financial institution.
- You can make a withdrawal by cheque, and either mail it in or deposit it into your account.
- You can make a withdrawal online through your bank’s website or mobile app. To do this, you’ll need to set up an online banking account and link it to your TFSA. Once you’ve done that, you can log in and make a withdrawal just like you would with any other type of account.
Remember, you can only withdraw funds that are already in your TFSA – you cannot borrow money from your TFSA. If you have any questions about how to make a withdrawal from your TFSA, reach out to your financial institution.
TFSA Withdrawals: Frequently asked questions
The TFSA is a hugely popular savings vehicle for Canadians, and with good reason. But like all financial products, it’s not without its quirks. Here are some of the most common questions and answers about withdrawals from TFSAs.
Can I withdraw money from TFSA anytime?
You can withdraw money from your TFSA at any time. However, here are some things to consider before making a withdrawal:
- If you withdraw funds, you may lose out on any investment growth that could occur in your investments. For example, if you sell stocks to access cash, the stock price could shoot up later and you would miss out on the capital gain.
- Additionally, if you withdraw money and then contribute it again within the same year, you may end up exceeding your contribution limit and incur a 1% penalty tax.
- Withdrawals can also impact your eligibility for certain government benefits, so it’s important to understand all the potential implications before making a withdrawal from your TFSA.
Ultimately, while you can withdraw money from your TFSA at any time, it’s important to consider all the potential consequences before doing so. Consider consulting a financial professional if you’re unsure if a TFSA withdrawal is right for you.
Can I withdraw money from my TFSA without penalty?
Yes, you can withdraw money from your TFSA without penalty. A penalty only applies when you over-contribute to a TFSA.
In addition, there may be other consequences to withdrawing money outside of the CRA. For instance, there is an opportunity cost when you sell investments to make a cash withdrawal. The opportunity cost is losing out on the interest, dividends and capital gains you would have received if you held onto your investments. Or you may incur fees to sell investments to withdraw cash. Be sure to consider these aspects as well, not just the tax consequences.
This is a common question because RRSPs have harsh penalties when a withdrawal happens before retirement. Many people assume the same is true with a TFSA, but it is not. There is much greater flexibility with a TFSA.
Related Reading: TFSA vs RRSP: Where to Put Your Money
Can I withdraw from TFSA online?
The process of withdrawing funds from a TFSA is quite simple. Often, the process can be completed entirely online with a few clicks. The only requirement for online withdrawals is having active account registration with your bank where your TFSA is held. Below are the steps to withdraw from your TFSA online.
- To start, log in to your account on the financial institution’s website.
- From there, navigate to the page where you can view your TFSA balance and transactions.
- Once you’ve found that page, look for the option to withdraw funds. This option may be located in a drop-down menu or in a separate section labelled “Withdrawals” or “Transfers”.
- Select the amount of money you’d like to withdraw, and then confirm the transaction.
That’s all there is to it! Online TFSA withdrawals are quick and easy, they usually take a few minutes.
When can you withdraw money from your TFSA?
In general, you can only withdraw money from your TFSA if you are 18 years of age or older. This is because the minimum age requirement for a TFSA is 18. Otherwise, TFSA withdrawals are possible at any time, given that you have sufficient funds.
For more information on TFSA withdrawal rules and other restrictions, please consult the Canada Revenue Agency website.
Do you need to access money in your RRSP? Learn more about RRSP Withdrawal Rules