TFSA Withdrawal Rules
Unlike an RRSP, you can make withdrawals from a TFSA with zero tax consequences. But there are still some rules to follow!
Contribution limits and over-contributions
The biggest rule to follow is related to your contributions: The annual contribution limit (as of 2020) is $6000, so to play it safe, if you need to withdraw money from your TFSA, make sure to hold off on re-contributing until the next calendar year.
If you re-contribute too soon (i.e. in the same calendar year), you run the risk of going over your limit and getting hit with a hefty 1%/month penalty! This is especially true if you have regularly contributed since 2009, have used up most of your contribution space since then, and are contributing close to the limit every year.
On the other hand, if you have never contributed since the TFSA’s inception in 2009, you actually have up to $75,500 of space available. Unless you are in the habit of contributing large amounts of money all at once, and then withdrawing it all at once, you are unlikely to go over.
To play it safe, follow this general rule: If you withdraw money, wait until the next calendar year to put it back. And check with the CRA as they can tell you what your current limit is.
Fees associated with withdrawals
Even though withdrawing money from a TFSA is tax-free, you may still have to pay some type of withdrawal fee. Check with your bank or brokerage firm to see if there is a fee. It could be a flat fee or a percentage of the withdrawal which may affect whether you want to make one giant withdrawal, or several smaller withdrawals.
Availability of funds in your TFSA
TFSA funds are theoretically available to withdraw whenever you want, but you may have invested in a type of fund that has a maturity date, such as a non-redeemable GIC (30 days to 5 years). This doesn’t mean you can’t get at the money, but you will have to pay a penalty for withdrawing it too early. Depending on the circumstances, your bank may waive the penalty (for instance, if you were getting a mortgage from that same bank and they were feeling generous), or they may decide to ding you big time by withholding any interest you earned and/or withholding some of your principal!
If you insist on having GIC’s as part of your TFSA portfolio, and you want to be able to withdraw your money at any time without penalty, your best bet is to make sure (at least) some of your GIC’s are of the cashable type – these don’t have a maturity date and can be redeemed at any time without penalty. If you are going the self-directed TFSA route, make sure to check for withdrawal fees, and remember you can always consult with an independent financial advisor to help you out.