TFSA Withdrawal Rules

The best things in life are nearest: Breath in your nostrils, light in your eyes, flowers at your feet, duties at your hand, the path of right just before you. Then do not grasp at the stars, but do life’s plain, common work as it comes, certain that daily duties and daily bread are the sweetest things in life.

~ Robert Louis Stevenson

I love TFSAs. I think they’re the best financial “innovation” to hit the market in a long time. Last week, I wrote a lot about the complexities that have built up, wreaked havoc on, and continue to threaten our financial system.

The beauty of Tax Free Savings Accounts (TFSAs) lies not only in their tax sheltering function, but in their simplicity. The rules surrounding this relatively new Canadian savings vehicle are noticeably sparse in comparison to those surrounding RRSPs and the tax code itself. I’ve previously written about the basics of TFSAs in the context of comparing them to RRSPs. (See TFSA vs. RRSP Duel: Who Wins? for a summary of the basic features of each.)

Today, I’d like to look at the specifics of withdrawing money from TFSAs. Although the rules are pretty simple, things can get a bit confusing, especially if you’re used to dealing with the rules of other financial products. I thought we’d look at a few examples to help make things a little clearer.

TFSA Withdrawal Basics

You can withdraw any amount from your TFSA at any time without paying tax on the principal or any accumulated investment gains. It’s your responsibility to track your contribution room limits, although the CRA does mention your limit on your Notice of Assessment. You don’t have to set up a TFSA or file a tax return in order to start gathering TFSA contribution room. You just have to be at least 18.

The main thing to be aware of when you withdraw money from your TFSA is that you can’t put the money back until the following calendar year. If you put it back in before the end of the same calendar year and that causes your total contributions for that year to exceed your contribution room limit for that year, you will have to pay 1% per month tax on the excess contribution amount.

Example 1

John opened a TFSA in 2009, the first year they were available. He contributed the maximum amount ($5000). In 2010, he was eligible to contribute another $5000 and he did so in January of that year. In March of 2010, John learned that he would be temporarily laid off. He withdrew $4000 from his TFSA, anticipating that he would need the money during his layoff.

A few weeks later, John’s employer landed a contract that meant he would be called back to work after only 2 weeks off.  John wanted to put $3000 back into his TFSA, but would be unable to do so until January 1, 2011 since he had already contributed his $5000 limit during 2010. If he was unaware of this rule and contributed the $3000 back anyway, he would be subject to the 1% per month tax until the end of 2010.

Assuming he understood the rules and held off on replacing any of the money he withdrew, John’s contribution limit for 2011 would be $9000. ($5000 for his regular 2011 contribution amount + $4000 to replace his 2010 withdrawal.)

Example 2

This is an example of how I used the TFSA withdrawal rules to manage our finances recently. If you’ve been keeping up to date with my quarterly planning reports, you know that we have experienced quite a reduction in our income level over the past 2 years or so due to my husband’s recent (and frequent) job changes. As a result of a potential budget shortfall this year, I felt that we might need to draw down some of the savings in our TFSAs.

In anticipation of this, I took some money out of each of our TFSAs at the very end of 2009. I did this to ensure that we could replace the money in 2010 if possible. If I had waited until January of 2010 to take the money out, we might not be able to replace that money until 2011.

For example: At the end of 2009, I took $5000 out of my husband’s TFSA, leaving only the accumulated interest in the account. (Note that investment gains and interest are not treated as contributions.) As a result, his new contribution limit for 2010 is $10 000 ($5000 for 2010 + $5000 from the 2009 withdrawal.) If I had waited and withdrawn the $5000 in January, his contribution limit for 2010 would only be $5000.

So technically, if all we wanted to do was to be able to replace the original $5000, we could have done so using 2010’s contribution room. However, now we have the option to contribute an extra $5000 if we are able to do so. Who knows? Things are looking a little better for us than they were at the last quarterly update. Tune in at the end of June for more details!

Note that there were some changes proposed in October of 2009 that would make some withdrawals ineligible for replacement in the following calendar year. However, most of these pertain to transactions by more sophisticated investors intended to game the system and take advantage of the relatively low 1% over-contribution tax. Frugal Trader offered a good review of these proposed TFSA changes at Million Dollar Journey.

If you have any questions or comments on TFSA withdrawals, please leave them in the comments section or send me an email.

Written by Kim Petch

25 Responses to TFSA Withdrawal Rules

  1. Hi two cents, thank you so much for this article!!!

    I just googled it and it came just in time to save me from getting over 6 months of 1% tax charge. (I am just about to withdraw money from my TSFA today at lunch hour and plan to deposit it back by the end of June.)


  2. I wish I had read this last year! I got charged 1% tax on $14,000 on my return, because I had withdrawn money and put it back in. I wasn’t aware that you couldn’t recontribute withdrawals until the following year. Silly me!

    • It can be hard to keep up with all of the rules on all of the financial products out there. I write about this stuff regularly, but I still have to keep reviewing the information as I find I forget the details very quickly.
      Thanks for stopping by!

  3. @Mark,
    Same here…my wife and I just got “hosed” as well…so much for “tax free” combined, we own government 1K…
    In my case, I kept my balance at 5K but obviously withdrew and deposited throughout year.
    You think there would be some sort of warning system letting you know about this loophole from institutions (banks). Not happy!
    Well, looks like the government will be getting their stimulous package from the people…again!

  4. I have regular minimum wthdrawals from a RIF going into a TFSA automatically. If I see that this is going to exceed my limit in a given year and withdraw money in November or December will that prevent me from going over that year?
    Thanks for the good advice on your website

    • Unfortunately I don’t believe it will. The CRA looks only at the amount of money you contribute in a given calendar year. If you go over your limit, you are charged the 1% tax based on the number of months the extra money was in your account. It’s up to you to make sure your deposits don’t exceed your limit in each calendar year.

      Thanks for your question! 🙂

  5. Hi: My Question. If I contribute in 2009 – $5000.00 and in 2010 $5000.00 and in 2011 – $5000.00 for a total of $15,000.00 and say this summer of 2011 it has grown to $75,000.00 and I take out the $75000.00. Is it true that in January 2012 that I can put back $75, the 2012 $5000.00 for a total of $80,000.00.

    • Lots of questions on this coming in – I’ll be doing some research and posting on it next week. Thanks for reading! 🙂

  6. If i take out 5000 from my TFSA… is there a timeline for when i have to pay it back? or do i have to pay it back at all if i choose so?

    • You don’t have to pay it back at all if you don’t want to. You just need to be careful not to pay it back within the same calendar year if adding $5000 would put you over your contribution limit. If it does, you can still recontribute it as of January 1st of the next calendar year.

      Thanks for stopping by Todd.

  7. If I have only contributed $800 this year and need to take it out am I still able to contribute up to my maximum ($4200) for the remainder of the year?? I’ve been told that once I make any withdrawal in any given year regardless of the amount I cannot contribute any more for that year even if I haven’t reached my maximum. That doesn’t make too much sense to me. Would appreciate any clarification you could give me. Thanks!

    • You can indeed hold U.S. stocks inside your TFSA, but I believe any dividends you receive from those stocks are subject to a U.S. withholding tax. There’s a really detailed article on TFSA tax implications here:

      Thanks for stopping by! 🙂

  8. You just made this SO easy to understand, after reading a dozen sites I finally get it with a simple story about John getting laid-off. Either I’m not too smart or you are really good at explaining things, probably a bit of both.

  9. can you carry negative balance from more then one year or just the the year before exp

    2009 put in 0.00
    2010 put in 0.00
    2011 put in 15000.00, 5,000.00 for each year.

  10. if I am looking at my tfsa, and I’m looking at the book value and the market value, which money is actually mine. If I were to withdraw funds, which “value” is it coming out of. I know book value is what I’ve invested, and market is what it is worth. But I am still not sure which money is actually mine!

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