The Tax-Free Savings Account (TFSA) is a really popular savings vehicle as over 16 million Canadians have one. However, despite its popularity, a considerable amount of people don’t understand all the aspects of the TFSA, including rules around withdrawing from TFSAs and TFSA withdrawal limits.
In this article, we’ll discuss TFSA withdrawal limits, TFSA recontributions, TFSA withdrawal fees, the best time to withdraw from a TFSA and what happens if TFSA withdrawals are more than contributions.
We’ll also answer some of the most frequently asked questions around TFSAs, including is there a limit to withdraw from a TFSA, do you pay tax on TFSA withdrawals, is there a penalty for withdrawing from a TFSA, and do TFSA withdrawals count as income?
What are the TFSA Withdrawal Rules
The TFSA is a federal government registered savings account that enables investors to save their money tax-free. This means that any money earned within the TFSA such as interest, dividends and capital gains is not taxed. Your money can grow much faster, as all earnings are kept and benefit from compound returns.
Given that other government-registered accounts, such as RRSPs, come with strict rules regarding contributions and withdrawals, it’s common for people to wonder about TFSA withdrawal timing and withdrawal limits.”
So, when can you withdraw from a TFSA?
As far as the government is concerned, you can withdraw from a TFSA at any time, with no TFSA withdrawal fees.
How to withdraw from a TFSA?
Withdrawing from a TFSA is very simple: you contact your financial institution and direct them to transfer the funds to another account, such as your chequing account. The process can take longer for certain investments, and some assets such as GICs may charge you a penalty for early withdrawal.
Is there a penalty for withdrawing from a Tax-Free Savings Account (TFSA)?
Some investments may not allow you to withdraw from a TFSA without a penalty (for example, non-redeemable guaranteed investment certificates), however the government doesn’t charge a penalty when you’re withdrawing from a TFSA.
Is there a TFSA withdrawal limit?
As far as the government is concerned, there is no TFSA withdrawal limit, but as mentioned above your financial institution may not allow for some TFSA withdrawals without a penalty.
Can I transfer money from my TFSA to my chequing account
Yes, you can transfer money from your Tax-Free Savings Account (TFSA) to your chequing account. Just contact your financial institution to arrange for the funds to be transferred to your chequing account.
A TFSA Withdrawal Example
When withdrawing from a TFSA, it’s important to understand that, if you’ve reached your TFSA contribution limit, you cannot make a contribution to replace any TFSA withdrawals until January 1 the following year. For this reason, many people feel that the best time to withdraw from a TFSA is later in the year, so you can recontribute soon afterwards.
It’s also important to understand that TFSA withdrawal rules allow you to contribute the full amount of any withdrawals made, even if that amount is more than the annual TFSA contribution limit. This contribution can be made starting the following year after the withdrawal is made from the TFSA.
Here’s an example of how the TFSA withdrawal rules work:
Jean has a well-paying job and has managed to contribute the maximum TFSA contribution amount each year since 2009.
In 2023, she contributed the maximum $6,500 TFSA limit.
At this point, her TFSA was worth $150,000, thanks to tax-free compound growth and good returns on her investments.
That same year, she cashed in all $150,000 of her TFSA to use as a down payment on her new home, as she hadn’t yet sold her old home.
In 2024, she sold her old home and was able to put $150,000 back into her TFSA, plus the 2024 contribution limit of $7,000.
The TFSA Withdrawal Limit
Many people wonder what the lifetime withdrawal limit is for a TFSA? As we’ve seen in the example above, there is no limit to how much you can withdraw from a TFSA (as long as your investments allow it, and all withdrawals can be recontributed the following year.
There are no TFSA withdrawal fees, though there is a penalty if you overcontribute to your TFSA in any given year.
TFSA Recontribution Rules
There are rules, however, regarding how much you can contribute to a TFSA. Since it began in 2009, the TFSA annual contribution limit has increased from $5,000 per year to $7,000 per year in 2024).
The TFSA is available to Canadians aged 18 and older. Therefore, if you were 18 or older in 2009, and had never contributed to your TFSA, your total accumulated TFSA contribution limit in 2024 would be $95,000.
It’s really important to know your TFSA contribution limit, because if you overcontribute you’ll pay a penalty of 1% of the overcontribution amount per month. You’ll need to withdraw the amount of the overcontribution from your TFSA to avoid paying the penalty.
How to Calculate Contribution Limit?
Your TFSA contribution limit for any year is calculated like this:
- The TFSA contribution for the current year (eg. $7,000 for 2024).
- Plus any unused contribution room since you turned 18 (or since 2009 if you were 18 or older then).
- Plus any TFSA withdrawals from the previous year.
Can You Use a TFSA for Retirement?
You certainly can. Given the large amounts that can be held in a TFSA, it’s becoming an increasingly important tool for retirement planning.
TFSA withdrawals are more flexible than RRSP withdrawals; you can make TFSA withdrawals at any time, at any age, with no tax consequences and no penalty. TFSA withdrawals are not classed as income, so they can provide a great way to minimize taxes on your overall retirement income.
And, because they’re not counted as income, TFSA withdrawals won’t affect your Old Age Security payments.
How a Reverse Mortgage Can Boost Your TFSA (and other) Retirement Savings
Many Canadians find that their retirement income is simply not enough, even if they’re lucky enough to have considerable TFSA savings.
According to Stats Canada, almost 20% of Canadian retirees feel that their income is not enough to comfortably cover their living expenses. This means that one in five Canadian retirees is struggling just to pay their bills. Even more are struggling to live the comfortable kind of retirement that they’d always dreamed of.
However, if you’re a Canadian homeowner aged 55-plus, there’s an easy and convenient way to boost your retirement income: with a CHIP Reverse Mortgage. You could cash in up to 55% of your home’s value and receive the money either as a lump sum or regular monthly deposits, so you have enough money to fully enjoy your retirement.
There are several key advantages of the CHIP Reverse Mortgage for Canadian retirees:
- There are no monthly mortgage payments to make, so it won’t have a negative impact on your retirement income.
- You only pay back what you owe when you move out or sell your home.
- You retain ownership and full control of your home.
- It’s typically easier to qualify for a CHIP Reverse Mortgage than a regular mortgage, line of credit or personal loan.
You can find out how much you could qualify for with a CHIP Reverse Mortgage by calling us at 1-866-522-2447 or by using our reverse mortgage calculator.
What happens if your TFSA withdrawal is more than your contributions?
This can often happen, because your contributions will grow tax-free and benefit from compound growth. Most people’s TFSA balance will be considerably higher than the amount they contributed, so it’s perfectly fine to withdraw more than you contributed, and there will be no penalties for doing this.
Do you pay tax on TFSA withdrawals?
No, the money you contributed to your TFSA is considered post-tax money, as there is no immediate tax benefit to contributing to a TFSA (unlike with an RRSP). Therefore, there is no tax payable on TFSA withdrawals.
If you withdraw from a TFSA, can you put it back?
Yes, but only during the following year, and up to the amount that you withdrew.
How much can you withdraw from a TFSA?
As much as you like, up to the full amount held in your TFSA.
Do TFSA withdrawals count as income?
No, TFSA withdrawals are not considered income, unlike RRSP withdrawals which are classed as taxable income.
What happens when you withdraw from a TFSA?
The amount you withdraw is added to your contribution limit for the following year. The government won’t charge you tax or a penalty when withdrawing from your TFSA.
