- Some Canadians can put up to $75,500 in a TFSA in 2021 — it depends on age.
- There’s no limit to how much you can withdraw from a TFSA.
- Over contributing to your TFSA can lead to tax consequences. Alex would owe $120 in tax if an over contribution of $3,000 remained in her account for as little as four months.
Tax-free savings accounts (TFSAs) have been available since 2009, and many Canadians have taken advantage of them.
According to the Canada Revenue Agency (CRA), nearly 14.7 million Canadians had a TFSA at the end of 2018—the latest data available—with an average balance of $20,300.
What is a TFSA?
A TFSA is more than just a savings account that you put cash in. In fact, a TFSA is more like an RRSP; TFSAs can hold cash, stocks, bonds, mutual funds, guaranteed investment certificates (GICs), and exchange-traded funds (ETFs). It’s a registered account that allows you to shelter any interest income and capital gains from tax, just like a registered retirement savings plan (RRSP).
There are differences between TFSAs and RRSPs, however. Withdrawals from a TFSA don’t count as taxable income, whereas when you take money out of an RRSP, they do. The only time you’re able to withdraw from an RRSP without paying tax is if you participate in the Home Buyers’ Plan or Lifelong Learning Plan.
Another difference is that you can contribute to a TFSA as long as you live. With an RRSP, you must stop making contributions the year you turn 71. At that time, you can either withdraw the funds, convert it into an annuity, or convert it into a registered retirement income fund.
One other difference is you can only start contributing to a TFSA when you turn 18 (or 19 if you live in a province or territory where that’s the age of majority). Everyone also gets the same amount of contribution room every year. With an RRSP, the contribution room is determined based on your income.
The federal government says anyone 18 and over with a valid social insurance number (SIN) can open a TFSA. However, non-residents who have a valid SIN can also have a TFSA, except they must pay a 1% tax each month on the funds held in the account.
How to calculate your contribution room
If you’ve never contributed to a TFSA, calculating how much you can contribute is quite easy. The contribution room starts accumulating when you turn 18 if you’re a resident of Canada.
Here’s the dollar limit for each year since TFSAs were introduced:
| Year | Dollar limit |
|---|---|
| 2009 | $5,000 |
| 2010 | $5,000 |
| 2011 | $5,000 |
| 2012 | $5,000 |
| 2013 | $5,500 |
| 2014 | $5,500 |
| 2015 | $10,000 |
| 2016 | $5,500 |
| 2017 | $5,500 |
| 2018 | $5,500 |
| 2019 | $6,000 |
| 2020 | $6,000 |
| 2021 | $6,000 |
| Total | $75,500 |
If you happened to have been 18 or older in 2009 and were a Canadian resident, you can put up to $75,500 in a TFSA today.
But it gets trickier to calculate if you’ve made contributions and withdrawals over the years. Let’s assume that Alex turned 18 in 2014 and has lived in Canada her whole life. She contributed the maximum amount every year between 2014 and 2019. At the end of 2019, her unused contribution room was $0.
At the beginning of 2020, her contribution room was $6,000. That year, she contributed $275 and withdrew $5,000. At the start of this year, 2021, an additional $6,000 was added to the contribution room. How much can she contribute this year?
- First, we’ll subtract the $275 contribution from $6,000 (the 2020 contribution room), which equals $5,725
- Then we’ll add the $5,000 withdrawal from the year before (2020), which equals $10,725
- And we’ll add another $6,000 (the 2021 contribution room) to $10,725, which equals $16,725
That means Alex can contribute $16,725 to her TFSA this year.
You can also check the CRA website or use the MyCRA app to find out how much room you have. However, the CRA’s information isn’t updated regularly as financial institutions have until the end of February to submit your previous year’s contribution amounts.
That’s why it’s best to keep track of your contributions, as you’re responsible for ensuring you don’t overcontribute. The CRA and your financial institution aren’t accountable for your mistakes.
How the TFSA contribution limit is determined
When TFSAs were introduced in 2009, the annual limit was set at $5,000, and increases were indexed to inflation in increments of $500. In 2015, the Conservative government changed the limit to $10,000 with no indexation.
However, the Liberals promised to reduce the limit to $5,500 and bring back indexation beginning in 2016 if elected (which they were). The annual limit increased to $6,000 in 2019, and the amount was the same in both 2020 and this year, 2021.
Withdrawing from a TFSA and replacing withdrawals
There’s no limit to how much you can withdraw from a TFSA. The amount withdrawn will be added back to your contribution room, but only at the beginning of the following year.
Contributing some or all the amount you withdrew in the same year can only be done if you have room.
Let’s go back to our example with Alex. She has $16,725 in contribution room in 2021. If Alex withdraws $5,000 tomorrow and decides to replace that amount later in the year, she can because she still has $11,725 in contribution room.
If you don’t max out your TFSA every year or make regular contributions, replacing withdrawals isn’t likely going to be a problem for you. But if you do, it means you could accidentally make an overcontribution.
Over contributing to a TFSA
Making an over contribution can lead to some tax consequences. Again, we’ll use Alex as an example. She has $16,725 in contribution room and decides to contribute $14,725 in April. A month later, she withdraws $3,000 for an emergency.
By September, Alex has saved up $5,000 and decides to contribute that amount to her TFSA. The problem is she doesn’t have $5,000 in contribution room; she only has $2,000.
Why’s that? As mentioned earlier, withdrawals from a TFSA are added back to your contribution room at the start of the following year. Now, she must pay a 1% monthly tax on the excess amount until the end of the year or withdraw the funds. If she leaves the money in her TFSA, she will have to pay $120 ($3,000 x 1% x 4 months) in tax.
If you transfer your TFSA from one financial institution to another, that doesn’t count as a contribution. But if you withdraw funds from one TFSA and put them into another TFSA, that’s considered a contribution.
