The Tax-Free Savings Account (TFSA) is a registered investment account in Canada that allows individuals to save and invest money tax-free. While TFSAs offer a lot of flexibility and tax advantages, there are specific rules regarding withdrawals and contribution room that individuals need to be aware of. In this article, we will discuss the rules regarding TFSA withdrawals and contribution room.
Withdrawals from a TFSA
Withdrawals from a TFSA are tax-free, which means that the money you withdraw from the account is not subject to any taxes. There are no restrictions on when you can make a withdrawal or how much you can withdraw from your TFSA. However, there are some rules that you should keep in mind when making a withdrawal from your TFSA:
Contribution Room: When you make a withdrawal from your TFSA, the amount of the withdrawal is added back to your contribution room the following year. To calculate your TFSA contribution room for current year, you may follow below formula:
Unused contribution room from previous years as of the beginning of current year
Plus your current year contribution room
Plus total withdrawal(s) made last year
For example, if in January 2023, you have an unused contribution room of $20,000 and also withdrew $4000 for a house repair in 2022, your available contribution room would be 20K+4K+6.5K (6.5K is 2023 contribution room announced by government)
Overcontributions: If you contribute more than your limit or even simply if you withdraw money from your TFSA and then re-contribute the same amount in the same year, it will be considered an overcontribution (unless you already have some unused room from previous years). Overcontributions are subject to a penalty tax of 1% per month on the excess amount until it is removed from the account.
Transfer to Another TFSA: You can transfer funds directly from one TFSA account to another without incurring any tax consequences or affecting your contribution room. This has to be done by Financial Institutions as a direct transfer. You cannot do it yourself.
Investment Losses: If you withdraw money from your TFSA and the account has suffered investment losses, you cannot claim the loss as a capital loss for tax purposes. In fact, you have even shrank your TFSA room moving forward.
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