A Guide to TFSA Withdrawal Rules and the Tax Implications | 2023 TurboTax® Canada Tips (2024)

FAQs

What are the rules for withdrawing from a TFSA? ›

You can withdraw funds from your TFSA any time you want¹ and you don't have to reach a certain age before you withdraw your money. Withdrawals made from your TFSA will be added back to your TSFA contribution room the following year. Your financial institution can help you make withdrawals from your TFSA.

Any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free, even when it is withdrawn. Administrative or other fees in relation to a TFSA and any interest on money borrowed to contribute to a TFSA are not tax-deductible.

You can withdraw from your TFSA without losing contribution room, and recontribute withdrawn amounts in the following years. While TFSA withdrawals typically aren't taxed, penalties might result if you over contribute or if a non-resident makes a deposit.

It also means that starting on January 1, 2024, eligible Canadians will now have a cumulative lifetime TFSA contribution limit of $95,000 (see “What is the lifetime contribution limit for TFSA?” below for examples and charts).

Withdrawals from TFSAs are tax free, which makes it convenient during periods where you do not want to increase your taxable income by drawing RSPs or realizing capital gains from a non-registered account.

There are some specific examples of when the CRA would ask you to pay tax on income earned inside the TFSA. This includes prohibited and non-qualified investments, for example. should you make a contribution while you are not a resident of Canada, or if your account contributions are in excess of your limit.

The most common TFSA mistake

If cash makes up the majority of the money you have in your TFSA, you aren't doing it right. But don't worry! You're not alone in making this mistake. Despite its name, a TFSA is not meant to function as a traditional savings account.

If you hold a TFSA when you leave Canada, you can keep it and continue to benefit from the exemption from Canadian tax on investment income and withdrawals. However, you cannot contribute to your TFSA while you are a non-resident of Canada, and your contribution room will not increase.

Should I hold cash in my TFSA? ›

But TFSAs have little in common with everyday chequing and savings accounts. That means one thing: they're no place for cash. If you're only using your TFSA to hold cash, you could be missing out on tax savings that come from investments that grow in value over time tax-free.

Yes, you can lose money on a TFSA, but it is easy to avoid losing your money. Typically, people who lose their money on a Tax-Free Savings Account are people who are using it for more volatile investments or people who are over-contributing.

There is no limit on when or how much you can withdraw from your TFSA. Generally, any amount you contribute and any income earned in a TFSA is tax free, even when withdrawn. Withdrawing funds from your TFSA will not reduce the total contribution you have made for that year.

Holding a volatile investment in a TFSA can be risky for a couple of reasons: First, if a capital loss is realized, that loss cannot be used to reduce other taxable capital gains you may have. Second, only the amount withdrawn can be added back to TFSA contribution limit the following year.

There are few free rides in personal finance, but Canada's tax-free savings account (TFSA) is one of the most generous to investors: interest, dividends and capital gains can grow tax-exempt, and there's no tax on withdrawals.

Withdrawals can be made while the plan holder is a non-resident. Any withdrawals made while a plan holder is a non-resident will be added back to the holder's unused TFSA contribution room in the following year, but will only be available when the holder subsequently resumes Canadian residency status.

If you want to transfer funds from one TFSA to another or from one issuer to another, there will be no tax consequences if your issuer completes a direct transfer on your behalf.

The annual tax-free savings account contribution limit is the maximum amount of money you can contribute to your TFSA account each year. Any amount you contribute to your TFSA throughout the year counts against what's called your "annual contribution room." For 2024, the maximum contribution is $7,000.

What if you've never contributed to a TFSA before? If you have lived in Canada your entire life and you were 18 or older when the Government of Canada first introduced TFSAs (in 2009) and you've never put money into a TFSA, then your contribution room could be as much as $95,000 (in 2024).