TFSA Withdrawals - Everything You Need To Know

By: Updated: January 12, 2022

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One of the great aspects of a Tax Free Savings Account is that making withdrawals is easy. While RRSP withdrawal rules seem to be made by the Canadian government’s version of the Grinch, the TFSA regulations are just like Santa – jolly and nice.

It’s simple to take money out of your TFSA, but that may not be the wisest course of action when you hit a cash crunch. 


Can you withdraw from a TFSA?

Absolutely. This is one of the great advantages of having a TFSA. You can withdraw money at any time without having any income tax withheld. There is no penalty.

Compare that to taking cash out of a Registered Retirement Savings Plan (RRSP). When you make a withdrawal there is a tax withholding. The more money you take out the higher the tax.

For RRSP withdrawals of up to $5,000, you will see 10 percent go to the government. Take out between $5,000 and $15,000 and you will face a 20 percent withholding. And for more than $15,000 you will be hit by a 30 percent tax.

So let’s say you need $20,000 for some home repairs. If you take the money out of your TFSA, you simply withdraw the $20,000 – there’s no tax. But if you choose to pull the money from your RRSP, you would need to take out a lot more to cover the tax. In fact, to get a $20,000 cheque you must withdraw a whopping $28,580.

Clearly, a TFSA withdrawal is much better than taking from your RRSP if you need cash.


Should you withdraw from your TFSA?

Just because it’s easy to withdraw from your TFSA, does that mean you should? Well, maybe.

Let’s look at the example above. You need to make some home repairs, including fixing a leaky roof, costing $20,000. These must be done so you have to find the money from somewhere. An option is to take out a Homeowner Equity Line of Credit (HELOC). This means that you can tap into the paid-up value of your home to borrow money. Since you are using your house as collateral, you will get a very low interest rate.

So which is better in this case: Take out a line of credit or tap your TFSA? It depends. If you take out a line of credit, you need a plan to make payments every month to pay it off. With a $1,000 monthly payment, you can bring the HELOC to zero within two years. However, if $1,000 a month is not feasible on your income, it may be better to withdraw from your TFSA rather than face endless interest on the line of credit.

Or you could take some of the money from your TFSA and use a line of credit for the remainder.

Over the long term, it’s advantageous to keep money in your TFSA. Investment growth is tax free so that in a few years you will have a nice nest egg. Making withdrawals can hurt your long-term savings!


TFSA withdrawal rules

As we have indicated, there are no tax implications to making withdrawals. That’s the good news.

The even better news is your withdrawal creates additional contribution room for the future when you are able to restart putting money into the account. In other words, you are replacing withdrawals.

How does contribution room work? The Canadian government restricts how much money you can put into a TFSA. The current limit is $6,000 per year. However, you may have additional contribution room if you have not put in the maximum amount in the past. The TFSA program started in 2009 and the annual contribution limit has ranged from $5,000 to $10,000 per year. If you have not contributed ever before, you could have contribution room of $75,500!

Now, let’s look at our example of needing $20,000 for home repairs. If you decide to take the full $20,000 from your TFSA, this builds new contribution room for the following year. So, if you have the money, you can put $20,000 into your account plus any contribution you may have for that year.

The simplest way to check your contribution room is to log into My Account on the Canada Revenue Agency website.


TFSA withdrawal limit

There is no limit to how much you can withdraw from your TFSA. However, it’s important to be aware that there may be restrictions based on your investment products. For example, your account may include Guaranteed Investment Certificates (GICs). If they are cashable or redeemable, you will not face any fees. However, if you have regular GICs, you must wait until the maturity date to cash out or face a penalty.


TFSA withdrawal tax and fees

As we’ve already indicated, there is no withholding tax on TFSA withdrawals. In addition, most financial institutions do not charge a fee for taking out money. Check with your account manager on TFSA fees.

You do not need to report your TFSA withdrawal as income on your tax return since it is not taxable. The funds will not have any impact on your eligibility to receive the full amount of Old Age Security. The OAS can be “clawed back” if you have an income higher than $79,054. While RRSP withdrawals must be declared as income, TFSA withdrawals won’t push up your earnings. There is no OAS penalty.


TFSA withdrawals are easy!

It’s simple to take money out of your TFSA. There is no tax withholding and you usually won’t be charged a fee. However, this does not mean that you should take this route every time you have a cash crisis. Consider other options, such as taking out a low-interest loan. For complete information on the TFSA program, visit the government of Canada’s TFSA website.


Are you incorporated in Canada?

Small business owners and incorporated individuals in Canada can use a Health Spending Account (HSA) to save up to 40% of their medical expenses.  An HSA has no premiums and it is a cost effective alternative to traditional health insurance.  The plan covers a wide variety of health and dental expenses.  An HSA takes only a few minutes to set up.  Learn more by downloading one of our guides.


Learn more about a Health Spending Account by downloading a free guide:

Download the HSA Guide for Incorporated Individuals Download the HSA Guide for a Business with Staff

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