TFSA Withdrawals

TFSA Withdrawal Rules

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.

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 You can re-contribute any funds you’ve withdrawn from your TFSA back into your account starting the year after the year in which you make the withdrawal.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.