TFSA Withdrawal Rules, Limits & Re-Contributions Explained

The tax-free savings account, also known as the TFSA, is a great initiative that the Canadian government introduced in 2009 to encourage Canadians to save.

While a TFSA account allows you to grow your money tax-free, certain rules govern contributions, withdrawals, and taxes.

Here’s what you need to know.

TFSA Withdrawal Rules

The Canadian government does not enforce any withdrawal rules for tax-free savings accounts.

You are allowed to withdraw any amount from your TFSA at any time in the year.

However, the TFSA issuer – i.e., the financial institution that you have opened a TFSA account with – may have fees associated with withdrawals, closures, or transfer of a tax-free savings account.

It is important to ask about any withdrawal fees or penalties when you want to open a TFSA with a financial institution.

You can use your TFSA withdrawals for any personal financial goals such as the down payment for a house, a car purchase, wedding, or even for retirement purposes.

A TFSA allows you to grow your investments and withdraw gains tax-free.

Unlike other tax-advantaged accounts like the registered retired savings plan (RRSP), and the registered education savings plan (RESP), the TFSA has no withdrawal rules that discourage individuals from withdrawing their money at any time.

Young couple calculating their TFSA withdrawal for a big purchase

TFSA Withdrawal Limits

You can use your TFSA to save for any financial goal including short-term or long-term goals.

The benefit of a tax-free savings account is that you can withdraw your money at any time.

Of course, this is dependent on the type of financial asset that you own in the TFSA.

If you buy assets such as stocks or exchange-traded funds (ETFs) in the financial market, you may need to sell the assets first before you can withdraw your money from a TFSA.

If you leave your savings in cash form, then your money will be readily available for you to withdraw at any time.

The amount you withdraw from your TFSA is dependent on what you want to use the money for.

While there is no limit to the amount you can withdraw, you need to ensure that the money you take out is not greater than your financial need.

Keep in mind that due to your contribution room for the year, you may not be able to re-contribute any excess amount back into your TFSA in the same year.

TFSA Withdrawal Fees

Most financial institutions will charge fees if you want to transfer your TFSA to another issuer.

Some financial institutions offer to cover the transfer fees when you move your TFSA over to them, provided certain conditions are met.

Make inquiries to see if you can qualify for a TFSA transfer fee reimbursement from your new issuer.

There may also be withdrawal fees associated with the sale of your financial assets when you want to convert these assets to cash in the case of a withdrawal.

TFSA withdrawal fees can vary across financial institutions and should be a factor that you consider when you want to open a tax-free savings account.

Replacing Withdrawals from a TFSA

The Canadian government has placed annual contribution limits on the tax-free savings account for each Canadian resident that is above 18 years old.

This contribution room accumulates for every year that you do not use it.

For 2022, this contribution room is $6,000. 

If you make withdrawals from your tax-free savings account in a given year, this does not increase your contribution room for the year.

However, in the following year, the withdrawal you made from your TFSA will increase your contribution room.

So TFSA contribution room is not lost if you make withdrawals.

When you want to replace a withdrawal that you have made in a year, you need to ensure that you have enough contribution room to accommodate the re-contribution.

If you do not have enough contribution room, your re-contribution can lead to an over-contribution in your TFSA account resulting in a 1% tax on the excess amount for every month that it remains in the account.

Example 1

Suppose you have TFSA contribution room of $6,000 in a given year, and in that same year, you withdrew $6,500 from your TFSA.

If you decide to re-contribute the same amount of $6,500 that you withdrew, this will result in an excess contribution of $500 over your contribution room.

The excess amount will be taxed at 1% for every month it remains in the TFSA until you withdraw it.

However, if you had contribution room of $10,000, then you will be able to re-contribute the $6,500 in the same year without any tax implications.

Example 2

Suppose you have TFSA contribution room of $6,000 in a given year, and you contribute $3,000 in January.
In May of that year, you withdraw the $3,000 you contributed for a spontaneous trip that came up.

Your contribution room DOES NOT revert back to $6,000 in that year.

Since you already contributed $3,000 in January, the remaining contribution for the year is $3,000 regardless of any withdrawals you’ve made.

Your contribution limits will be adjusted in the following year to account for the withdrawal.

Lastly, when you make a qualifying transfer of the funds in your tax-free savings account, this is not considered to be a withdrawal and does not affect your contribution room.

Qualifying transfers between TFSAs include transferring your TFSA from one issuer to another or TFSA transfers following the breakdown of a marriage or common-law partnership.

A qualifying transfer needs to be made by the TFSA issuer.

If you make the transfer yourself, it will count as a withdrawal and therefore affect your contribution room.

Frequently Asked Questions

  • Can I take money out of my TFSA without penalty?
  • When can you withdraw from TFSA without penalty?

Adeola is a Chartered Accountant and business finance professional. She is very passionate about financial literacy and education. When she’s not crunching numbers, she loves spending time with family.