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Your Guide to TFSA Contribution Room, Withdrawals, and Investment Gains

Your Guide to TFSA Contribution Room, Withdrawals, and Investment Gains

2019. It’s hard to believe that it’s been 10 years since the Canadian government launched the Tax Free Savings Account, creating a new way for Canadians to save money and avoid paying taxes on the growth of that money.

If you ask me, TFSAs are an investment vehicle that all Canadian investors can benefit from. But while the plan appears straightforward on the surface, there are a few things you’ll want to be aware of, in order to get the most from your TFSA investment account.

In this article, we’ll take a look at three important aspects of the TFSA: contribution limits, TFSA withdrawals, and the treatment of capital growth on those withdrawals. If you’re looking for a more comprehensive guide to TFSA investing, including where to invest your TFSA, this article will give you everything you need to know. For now, let’s take a closer look at these three components.

Understanding TFSA Contribution Limits

It’s important to know how TFSA contribution limits work. Not only will it help you avoid the costly penalties associated with TFSA overcontributions, knowing your own personal contribution limits, both annual and lifetime, will enable you to maximize tax savings and investment growth. This includes knowing how to properly replace any withdrawals you make from the TFSA, something we’ll get into in more detail later.

You become eligible to open a TFSA in the year in which you turn 18, providing you hold a valid SIN number. For 2019, the annual contribution limit is $6,000, and the maximum lifetime contribution room, dating back to 2009, is now $63,500.

In other words, as long as you were 18 or over in 2009, and had never contributed to a TFSA, you could deposit up to that amount ($63,500) this year. If you weren’t, start counting from the year you turned 18. Be careful not to exceed your contribution room. Overcontributions are subject to a penalty of 1% per month until the plan balance is brought within the allowable limit.

A Look at TFSA Contribution Room, by Year

Here’s a look at the yearly TFSA contribution limits, going back to 2009, when the TFSA was first introduced. As I mentioned, the contribution room begins to accumulate in the year you turn 18. For example, someone who turned 18 in 2013, would have a lifetime contribution limit of $43,500. A great thing about TFSAs is that you don’t need to have earned income to accumulate contribution room. Unlike RRSPs, all Canadian adults have the same annual limits, regardless of income or employment status.

Annual TFSA Contribution Limits, 2009-2019.

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

Total Lifetime: $63,500

* Annual TFSA limits are indexed to inflation, and rounded to the nearest $500.

Understanding TFSA Withdrawal Rules

In general, TFSAs offer more flexibility than other tax-sheltered investments, such as RRSPs, when funds are withdrawn. Unlike an RRSP, money invested in a TFSA is completely tax-free. That means that not only will you not pay tax on the interest you earn, but you won’t be required to report withdrawals as earned income at tax time. Because TFSA withdrawals aren’t considered earned income, they won’t impact other government benefits, such as Old Age Security (OAS) benefits, which are tied to your income level.

Another benefit to TFSA withdrawals is that money removed from a TFSA doesn’t take away the contribution room. In other words, any withdrawals you make in the current calendar year can be re-contributed as of January 1st, of the next calendar year.

To illustrate this, let’s say you turned 18 in 2018, and on June 30th of that year, made a $5500 contribution to your TFSA. If you withdrew the $5,500 on September 30th, you would not be eligible to make another contribution in 2018. However, effective Jan. 1, 2019, your contribution room would be reset to $11,500. This would include the $6000 for 2020, and the $5,500 that was withdrawn on September 30th, 2018.

Investment Gains and Replacing TFSA Withdrawals

In the past, I’ve written about the TFSA Withdrawal Rules, and provided some examples of how they work. But I often receive questions from readers asking how investment gains inside their TFSA will affect their TFSA contribution room. Here are a couple of scenarios I was presented with recently:

Let’s say I contributed $5,500 in 2017, another $5,500 in 2018, and $6,000 in 2019, for a total of $17,000, then somehow managed to grow this amount to $30,000, with strong market returns. If I take out the $30,000 at the end of this year (2019), is it true that as of January 2020, I can put back $30,000, plus my $6000 room for 2020, for a total of $36,000.00?

Another reader had a similar question:

…I am also curious about my investment gains, and how they impact my contribution room. For example, I contributed the max $11,000 over my first two years, but managed to double it through investing. If I withdraw $22,000 this year, does that mean I can contribute back the $22,000 next year, in addition to next year’s contribution room? Someone told me that even if the max contribution over the next 5yrs is $30,000, if you build the account to $100K then that becomes the real limit of the account. In other words, if I withdraw $100K in year 6, I can contribute back $106K in year 7. Does this make sense?

In both of these scenarios, the answer is yes. To make this clear, it’s best to refer to the contribution guide provided by the Canada Revenue Agency (CRA).

According to the CRA, the Tax Free Savings Account limit is made up of:

Recapping Our Reader Scenarios

Using the CRA guidelines, let’s recap the two reader scenarios above, and look at a third scenario, involving an investment loss, and its subsequent impact on the contribution room.

Scenarios #1 & 2: Investment Gains

Taking our first reader’s scenario into account, their contribution room calculation for 2020 would look like this:

2020 TFSA Limit: . . . . . . . . $ 6000

(assumed limit, based on the fact that the limit increased in 2019, as per inflation index.)

Unused Contribution Room from previous years: . . + $ 0

(Note that unused contribution room can be negative if you over-contributed in previous years.)

2019 Withdrawals: . . . . . . . + $30,000

2020 Contribution Room: . . . . . = $36,000

In terms of the second reader’s question, he is correct. If you contributed a total of $11,000 in the first two years (2016 and 2017) and by tremendous skill or luck doubled that money, you could withdraw the $22,000 at the end of 2018, and contribute back the $22,000 plus your $6000 this year (2019). He is also correct, in theory, that if you grew the account to $100 000 in 5 years, you could take that $100K out at the end of the 5 years and recontribute it starting the following January.

I qualified this explanation with “in theory” because this scenario assumes that there were no other withdrawals and no over-contributions. Also, it may not be entirely correct to say that your contribution limit has permanently grown to $100 000 because you could sustain investment losses down the road that would reduce the size of the TFSA.

Let’s look at an example that includes some investment losses:

Scenario #2: Investment Losses

Suppose, as in Scenario #1, that you had contributed $17,000 over the first 3 years (2017, 2018, and 2019). However, instead of almost doubling the amount to $30,000, as in our extremely optimistic first case study, you sustained a substantial 33% loss.

Ouch. Your TFSA would then be worth about $11,400 instead of $17,000. If you withdrew the entire $11,400 in 2019, here’s what your 2020 contribution limit calculation would look like:

2020 TFSA Limit:. . . . . . . . . $6000

Unused Contribution Room from previous years: + $ 0

2019 Withdrawals: . . . . . . . + $11,400

2020 Total Contribution Room: . . . . . = $17,400

Note that this contribution room limit is lower than what your limit would have been if you had not sustained any losses. An investor who had contributed the maximum $17,000 in their first three years and (in theory) incurred neither gains losses, would have $23,000 in total contribution room for 2020.

I should note that the annual Tax Free Savings Account limit is indexed based on the inflation rate, with the indexed amount rounded to the nearest $500. For example, if we assume that the inflation rate is 2% for 2019 to 2021, then the TFSA contribution limit would be $6,000 for 2019, 2020, and 2021, increasing to $6,500 for 2022.

In the above scenarios, I’m assuming that the contribution limit for 2020 will remain at $6,000, as it was just indexed for inflation in 2019 when it increased from $5,500 to $6000.

Keeping Track of Your TFSA Contribution Room

The examples I provided above are very simple. Your personal scenario may be more complicated if you have done any transfers between multiple TFSA accounts, or over-contributed at any time. If you really want to know what your contribution room is a good place to start is to do the math by following the CRA formula.

Unfortunately, your financial institution is unable to keep track on your behalf, as they often don’t have the necessary information at your disposal. For example, you can hold multiple TFSA accounts at various financial institutions, with each one affecting your contribution room.

You can also get TFSA contribution room information from your My Account page on the CRA website or from the CRA’s T.I.P.S. telephone service at 1-800-267-6999. That’s because the CRA determines the TFSA contribution room for all eligible Canadians, by tracking information provided by you, as well as your financial institution. As a result, your TFSA contribution room will be shown on your income tax Notice Of Assessment (NOA).

Comments

  1. Jessica07

    How many of those are you allowed to open up? 😉

    • 2 Cents

      Wouldn’t it be great if the contribution room applied to each account? 😉 Of course, it doesn’t. You can open as many accounts as you like, but your total contribution limit across all of them remains the same.

  2. The Passive Income Earner

    Very nice explanation on the TFSA withdrawal rules. Thanks for checking with the CRA on the rules.

    • 2 Cents

      Glad to help! 🙂

  3. My Own Advisor

    Good post! I just wish I had $75,000 in my TFSA 🙂

    • 2 Cents

      Thanks. $75,000 would be a very nice gain. If you had $75K in your TFSA already, I’m sure you could make a lot more offering investing advice! 😉

  4. Stephen

    If I just opened up a TFSA this year, can I still use the room I would have had in 2009 and 2010?

    If anybody is trying to choose between TFSA and RRSPs, here’s a calculator to help figure it out.

    • 2 Cents

      The short answer is yes. You accumulate contribution room from the year you turn 18 (2009 and later) whether you’ve opened a TFSA or not.

      Thanks for sharing the calculator!

  5. ronika

    Thanks for looking into this. Given the relative newness of the TFSA program, I imagine there are going to be many situations that are going to require clarification.

    • 2 Cents

      Probably. There are always a few bugs to iron out with any new program. Still, I think this is one of the best things to come out of the Canadian government in quite some time.

      Thanks for stopping by! 🙂

  6. BeatingTheIndex

    This post was well worth reading, I am glad you used real life examples involving capital gains and losses.

    Now the 2nd question is, how do I get my TFSA to 75k asap? 🙂

    • 2 Cents

      Yeah. The reader who asked that question was pretty clear that his example was more wishful thinking than anything. I’m sure we all wish we could grow our TFSAs that quickly!

      Thanks!

  7. Jaymus (RealizedReturns)

    Great post. I find so many people I know are still so confused about the TFSA. I personally love the TFSA for its simplicity, but that simplicity seems to add to uncertainty for many people.. they fear having to figure out the details of yet another type of registered account.

    • 2 Cents

      I think the TFSA was a great idea too. Once you understand the basics, however, they’re pretty easy to understand. In many ways, they’re a lot simpler than an RRSP.

      Thanks for stopping by! 🙂

  8. Confused

    I have a question and Im kind of naive to all this investing…sorry 🙁
    I have just received an annunity through my Aunts will….I will be receiving 233.00 / mnth for life! Im 44 years old….Would I be wise to open an TFSA account and have this money put in monthly or what should I do with it….I would like to invest somehow as I don NOT need this money right now and would like to invest for my future as my Aunt wanted…. Thanks so much for your help!

  9. Stu

    No one mentioned having only dividend stocks in TFSAs. If you withdraw $1000 a year in tax free dividend income then you get to contribute $6000 the following January. Double bonus!

  10. T. S. Eliot

    Update required. The TFSA dollar limit for 2012 is $5,000 and the CRA no longer provides contribution room on the notice of assessment.

  11. Lucy

    Thanks for the post. I called CRA today however the gentleman advised me that only the principal that you withdrew this year will be considered as extra contribution room for next year. Therefore, for example, if you contributed $5,000 in 2009, and made a capital gain of $20,000 and you withdrew the entire $25,000 at the end of 2009, you can only contribute $10,000 ($5,000 allowable contribution in 2009 plus $5,000 in 2010). He said any capital gains, interests and dividends that you withdrew will NOT create extra contribution room for next year. Would someone please verify? Thanks!

    • Frank

      This sounds logical (capital gains do not create extra room) and I would like to know the answer as well. For example, if you put $5500 into your TFSA in Jan 2017, then it magically grew to $105,500 by December 2017 at which point you withdraw it. I doubt the following year the gov’t would give you the extra 100K earned as contribution room. I believe in 2018 you would get $5500 added back into your contribution room, not the $105,500. If it did work this way, smart investors who made gains would sell their investments and withdraw in late December, then re-invest the entire amount early January to “create” extra contribution room based on capital gains, interest, and dividends. If this did work, the gov’t would surely close this strategy.

  12. Dani

    What about First-time contributors?
    How much I can put away as first lump?

  13. mark

    Does the “previous years” withdrawal only carry forward into the following year or every year after that?

    Example: I’ve contributed the maximum each year and grew my TFSA to $1 Million. I take out the entire balance and next year I don’t want to put the million back in, I want to wait 5 years.

    Can I put the million back in 5 years from now or do I have to put it back in the following year from when I withdrew it?

  14. PigeonTom

    This is so wrong!!! Your withdrawals of gains do not increase your contribution room!!!

    • Tom Drake

      Hi PigeonTom, using another source to back this up, “thanks to some fortuitous stock picking, you were able to grow your TFSA to $100,000. Realizing your luck, you decide to finally make a withdrawal, using it all for a down payment on a cottage. What is your contribution room on the first day of the new year? The answer: $105,500” http://www.moneysense.ca/save/investing/tfsa-contribution-limit-rule/

  15. Kim

    I have a TFSA and I started in Oct.2015. I increased my contribution to $1000/month, cause I’m trying to save as much as I can. Am I on the right track or I am over contributed and what should I do?can I take out some money for not to be penalized.

  16. Jordan

    Hey, so just for clarification. Let’s say i put in like 50,000 for my contribution and maxed it out, then it grows to 100k next year, if I were to withdraw it, it would increase my contribution for next year to 100k right? if so is this contribution to 100k permanent? Because if it were, then if I didn’t contribute anything the year my contribution is 100k, then would it mean that next year my contribution would be plus 100k for unused contribution + the next year contribution limit? so it would total like 200k + the next year contribution limit.
    Is this how the contribution limit work?
    Sorry very weird answer, in short “Can I make my contribution limit to a permanent to like 1 million and it will stay there?”
    Sorry just need clarification

  17. Ben

    Hello Tom,
    First! I want to thank you for the wealth of knowledge you are sharing here.
    My question or related to TFSA.
    I’ll explain with a scenario for context!
    Suppose I sell some of my stocks worth $1000 but I don’t take the money out of the TFSA account, rather I use the funds to buy another stock or ETF. Is that $1000 considered a contribution to my TFSA when I use it to buy a new stock?

    • Tom Drake

      Hi Ben, you’d be fine there, as the cash is still in the TFSA. As long as you’re not withdrawing to a different account then it’s all still part of your TFSA balance.

  18. William James Clayton

    So this year 2020 I have had losses of $2900 in etf’s I have sold within my TFSA. Can I deposit $2900 to replace that loss?

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