So, you have some savings in a tax-free savings account (TFSA) and you’re thinking about making a withdrawal. Maybe you’re dealing with unexpected expenses, or maybe you’ve reached a savings goal and are ready to make that down payment or make that large purchase. The good news is that withdrawing from a TFSA is pretty straightforward. There are no limits to how much you can withdraw, and there are no withdrawal penalties.
Taking just a few minutes right now to educate yourself on the ins and outs of the process will help you to feel confident in your decision to withdraw, whenever the time comes.
What is a TFSA?
A tax-free savings account (TFSA) is kind of like a bucket that can hold cash savings, mutual funds, guaranteed investment certificates (GICs), exchange traded funds (ETFs) and individual securities (like stocks and bonds). Your TFSA is registered with the Government of Canada, which has a program that allows the assets in this “bucket” to grow tax-free, as opposed to non-registered accounts or Registered Retirement Savings Plans (RRSP’s), which have their own tax considerations. A TFSA is a great way to grow your emergency fund, save for a particular purchase, or save for retirement without losing easy access to your funds.
Making your TFSA work for you
By diversifying the types of assets and investments that go into your TFSA, you can take advantage of its tax-free growth potential and the access it offers you to your savings. For instance, you might want your TFSA to include six months’ worth of expenses in cash that can be withdrawn in case of emergency, with the rest of your money invested in mutual funds that have more growth potential over time and will fluctuate in value along with the market.
It’s important to remember that even though you can withdraw from your TFSA without penalty at any time, you will have to give more notice to withdraw funds if you are invested in mutual funds versus if you just had it in cash.
Why withdraw from your TFSA?
The reasons why you might want to withdraw from your TFSA are probably related to the reasons you started contributing to a TFSA in the first place. Accessing an emergency fund, withdrawing savings in order to make a big purchase or start the next phase of your life, or simply drawing on your available resources when things get tight are all good ways to make good use of the flexibility of a TFSA.
Unlike withdrawals from an RRSP, TFSA withdrawals don’t count as taxable income. And unlike the case with an RRSP, if you take money from your TFSA, the amount of your withdrawal is added to your contribution room the following calendar year.
TFSA contribution limits
So how do withdrawals affect the amount you’re allowed to contribute to your TFSA?
You can picture your TFSA contribution room as a simple equation. Start with the sum of the annual contribution limits (set by the Government of Canada) from the year you turned 18 to the present year, or from 2009 to the present year, whichever period is shorter. (You can find annual contribution limits here.) Then subtract the sum of the TFSA contributions you’ve already made. Then add back the sum of any withdrawals you’ve made from your TFSA in years previous to this one.
The easiest way to confirm your current contribution room is through your CRA account online.
Speaking of the CRA, if you overcontribute to your TFSA, the excess amount is taxed at 1 percent per month. And when you withdraw an overcontribution, that amount does not get added back to your contribution room the following year.
How to withdraw from your TFSA
How you withdraw may depend on your financial institution. If you’re an ATB customer and opened your TFSA Account with ATB Prosper or one of our financial advisors, you will have to speak directly with them to process your withdrawal. Before you call, make sure you know which assets within your TFSA you want to make the withdrawal from. Withdrawals of cash assets can usually be processed the same business day, while withdrawals from market-invested assets (like mutual funds, stocks and bonds) usually take up to three days. GICs have their own rules governing when they can be cashed or redeemed; if you want to withdraw from an investment certificate held within your TFSA, make sure you can do so without penalty.