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One of the things that makes the tax-free savings account (TFSA) such a useful savings tool is the fact that you can withdraw money from it at any time, without any tax consequences. This is the reason the TFSA is described as such a flexible savings vehicle: Withdrawing funds whenever you please means you’re able to save for a multitude of different financial goals that have equally diverse time horizons. But there are some things you need to know about taking out money. Here’s a look at the rules surrounding withdrawals from your TFSA.
TFSA Withdrawal Rules
You’re generally allowed to withdraw any amount from your TFSA whenever you want. All withdrawals are tax-free, which means that they don’t have to be reported as earned income when tax season comes around. Another benefit of tax-free withdrawals is that they don’t have any effect on your eligibility for certain government tax benefits such as Old Age Security (OAS), which can be reduced if you earn higher income levels.
An important rule to be aware of when it comes to withdrawing from your TFSA, is that making a withdrawal doesn’t result in lost TFSA contribution room. Withdrawals you make this year will be added to your unused contribution room. Also, you can’t contribute more than your TFSA contribution room even if you make a withdrawal during the year. This is one of the most common TFSA mistakes that people make. At the beginning of the following year, the amount you withdrew is added to your unused contribution room.
As a rule of thumb, you should always remember that you start each calendar year with a set amount that you can contribute to your TFSA. This amount can only be reduced within the same year when you make contributions. It’s also noteworthy that any unused contribution room that you have is carried forward to future years.
Re-contributing to your TFSA
Although withdrawing from your TFSA has no effect on your contribution room in the year that you make the withdrawal, it does affect your contribution room for the following year. You can re-contribute any funds you’ve withdrawn from your TFSA back into your account starting the year after the year in which you make the withdrawal. This aspect of the TFSA is what makes it the gift that keeps on giving—it lets you to save up for your financial goals, and once you’ve reached them, you get to go back and start making more use of it for future goals as early as the next calendar year. This is also why it’s generally recommended if you’ve maxed out your TFSA that you withdraw from your TFSA closer to the end of the year if you’re able to, so that you can regain that contribution room sooner.
TFSA Withdrawal Example
You can also use Ratehub.ca's TFSA limit calculator to determine how withdrawals and contributions impact your own personal limit for this calendar year.
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In the example above, Claudia starts out with $10,000 in contribution room because that was the TFSA contribution limit for the year 2015. Notice that as she made contributions to her TFSA throughout the year, her available contribution room decreased by the same amount. However, whenever she made a withdrawal from her TFSA, her contribution room stayed the same.
Now in 2016, Claudia’s contribution room consists of three things: The 2016 TFSA contribution limit made available to her, her unused contribution room from the previous year, and the withdrawals she made in the prior year.
Putting numbers to this, we see that Claudia gained $5,500 in contribution room for 2016, she had $5,800 in unused contributions from 2015, and she withdrew a total of $2,500 from her TFSA in 2015. This gives Claudia a grand total of $13,800 in contribution room for the year 2016.