TFSA (Tax-Free Savings Account) is a unique kind of investment account in Canada since investment gains and dividends are generally tax-free.
In a regular non-registered account, dividends and half of the capital gains are taxable. Since TFSA gains are tax-free, TFSA has rules and limits.
Compared to TFSA deposits which have rules and limits, TFSA withdrawals have little to no rules. You can withdraw cash from a TFSA anytime as long as the investment can be converted to cash easily, such as stocks, ETFs, and a savings account. TFSA GIC may be not accessible to withdraw for years.
Furthermore, here are a few examples and some things to know about withdrawing from a TFSA.
1. TFSA Withdrawals are Tax Free
Withdrawals from a TFSA are completely tax free with no limit. Whether your TFSA investments gained or lost capital, there is no tax on TFSA withdrawals.
2. No Limit on TFSA Withdrawals
The amount of TFSA withdrawals has no limit. Technically, you can withdraw everything you have in a TFSA. Also, you can withdraw from a TFSA as frequently as you like.
No matter how much TFSA Contribution limit you have or how much the investments gained or lost, the amount of TFSA withdrawals will have no limit.
How many times a year can I withdraw from my TFSA?
You can withdraw as many times as you like in a year from a TFSA. There is no limit on the amount and frequency of TFSA withdrawals. However, you have to wait until next year for withdrawals to be recouped back to your TFSA Contribution Limit.
3. TFSA Withdrawal Fees
For the most part, TFSA withdrawals have no fees. The most common method of transferring cash from a TFSA through EFT (Electronic Funds Transfer) to a chequing account will typically result in zero fees.
TFSA withdrawal fees may apply in some methods of cash transfer or an account may charge when receiving cash. For example, a withdrawal from a TFSA through a Wire Transfer may be charged about $20.
Unlike chequing accounts, savings accounts may charge a fee when receiving money. Thus, a savings account may charge some fees when receiving cash from a TFSA.
4. You can withdraw cash from TFSA anytime
TFSA withdrawals have little to no restrictions. You can withdraw cash from TFSA anytime. However, some investments may not be easily convertible to cash. For instance, GICs (Guaranteed Investment Certificates) in a TFSA may not be accessible for withdrawal until your GIC matures.
In rare circumstances, you may be enrolled on an investment plan that may restrict withdrawal for a certain time frame. In general, funds on most TFSA accounts can be withdrawn anytime.
Common investments in a TFSA such as stocks, ETFs, and TFSA Savings Accounts are easily converted to cash. Stocks and ETFs generally take 2-3 days after selling before it is converted to cash. Stock trades take 2-3 days to settle.
You may have to sell some stocks or investments to be able to withdraw. TFSA investments have to be converted to cash first to be accessible for withdrawal.
Here is an article that lists the TFSA Investments Options that are available. To maximize potential returns, stocks and ETFs in Canada and US stock markets can be invested in a TFSA.
Related Post: How to Start Investing in Stocks in a TFSA (5 Steps)
5. Amount of TFSA Withdrawals will be added back to your next year’s TFSA Limit
Withdrawing from a TFSA is not a big deal. The total of withdrawals from a year will eventually be added to your next year’s TFSA deposit limit.
Should a person withdraw a total of $3,000 during a year, the next year’s contribution limit will be $3,000 in addition to the new yearly TFSA limit and any unused contribution limit from previous years.
Can you take money out of your TFSA and put it back in?
Generally, you can take money out from a TFSA anytime. Whether you can put it back in or not immediately depends on your current TFSA Contribution Limit. TFSA withdrawals will be added back to your contribution limit every January 1 next year.
For example, assume a person has a $12,000 contribution limit to start the year. After $10,000 of deposits to TFSA accounts, the remaining limit will be $2,000. A total of $5,000 in TFSA withdrawals will not be able to be put back in immediately since there is only $2,000 left in remaining contribution limit.
In January next year, the whole $5,000 withdrawals can be deposited back in. For the current year, only up to $2,000 in the remaining limit can be put back in TFSA.
Your TFSA Contribution limit can be found on your CRA My Account which updates every January.
For more details on how the TFSA contribution limit works, here are the full details with examples of How the TFSA Contribution Limit Works.
6. TFSA withdrawals have no minimum
Technically, you can withdraw a minimum of $1 from most TFSA accounts.
TFSA Withdrawal Example
Assume a person has a $17,000 contribution limit at the start of a year. From total contributions of $14,000 to TFSA accounts, the remaining limit left is $3,000 for the year. In the same year, the person chose to withdraw $1,000 every five times, which is a total withdrawal of $5,000.
The remaining deposit limit left for the year is $3,000, so the $5,000 cannot be deposited back in. The $5,000 in withdrawals will be added back to next year’s TFSA Contribution Limit.
The next year’s contribution limit amount will be the unused limit on the previous year ($3,000) + withdrawals on the previous year ($5,000) + the new TFSA limit amount set by the federal government ($6,000 – subject to change) = $14,000 TFSA Contribution Limit.
How to Invest in a TFSA
There are several types of TFSA accounts that hold different types of investments. For instance, TFSA Savings Accounts work like a savings account that earns a constant small interest income. TFSA Savings Accounts can sometimes also hold GICs.
On the other hand, a TFSA self-directed account can hold investments such as stocks and ETFs that are listed on stock exchanges in the United States and Canada. Most investing platforms in Canada and the big banks offer a TFSA self-directed account.
One of the best TFSA accounts to invest in stocks in Canada for first-time users is Wealthsimple Trade. Wealthsimple Trade has a simple-to-use platform which targets everyday people. Wealthsimple Trade has no minimum requirement to start investing in stocks.
Big banks also offer self-directed TFSA accounts, but big banks often have more requirements to open an account. Big banks charge about $9.95 per stock trade which can be costly over time. Big banks are generally better for retirement investments such as an RRSP account.
Related Post: How to Start Investing in Stocks in a TFSA (5 Steps)
TFSA Over-contribution 1% Penalty a Month
Deposits above your TFSA Contribution Limit amount are subject to 1% monthly tax by the CRA. Should you overcontribute, try to withdraw the funds immediately so that the penalty may not apply in the next month. For more in-depth details about TFSA, visit canada.ca.
Can I take money out of my TFSA without penalty?
Money can be taken out of TFSA tax-free and anytime without a penalty. TFSA penalty will apply to over contribution (deposits above the contribution limit).