TFSA withdrawal rules: Everything you need to know

If you've been setting aside money in a Tax-Free Savings Account (TFSA) and you've met your goal, it's time for the next step in the process — withdrawing your funds.

The good news is that when you're ready to make a withdrawal, you can take out as much as you want from your TFSA without any penalties or taxes. Here's what you need to know.

As you already know, the Tax-Free Savings Account (TFSA) is a great way to save. Remember, you can use your TFSA to hold different investments, such as cash, stocks, bonds, exchange-traded funds (ETFs), guaranteed investment certificates (GICs) and mutual funds.

Each year, you can invest up to the maximum TFSA contribution limit. The limit for 2024 is $7,000.

To make a withdrawal for your TFSA, you simply need to contact the financial institution where your TFSA is held. You can also withdraw the money online.

Although you can make a withdrawal anytime you need your money without worrying about penalty payments or taxes, there are some rules to be aware of.

Withdrawing funds from your TFSA will not reduce the total contribution you've made for that year. While it's possible to recontribute any amount you withdraw from your TFSA, you have to wait until the following year to do that — unless you still have available contribution room.

For instance, imagine you:

• Have $6,500 in available contribution room for 2023
• Contributed $3,000 in February 2023
• Withdrew $1,000 in July 2023

In this scenario, you can still contribute an additional $3,500 in 2023, since you have unused TFSA contribution room.

However, if you had already contributed the maximum amount of $6,500 for 2023, you would not be able to contribute again until the next year, 2024. For instance:

• You have $6,500 in contribution room for 2023
• You contributed $6,500 in February 2023
• You need to withdraw $1,000 in July 2023

In this case, you can contribute on January 1 in the following calendar year (2024), because you already contributed up to the maximum limit.

If you're planning to fund a big expense in 2024 with a withdrawal from your TFSA, it makes sense to withdraw your funds before December 31, 2023. This way, your contribution room resets on January 1, 2024, and the amount you withdrew is added to your contribution limit. If you have the capability to invest more money in your TFSA, you can continue to earn tax-free growth.

There's no limit to how much you can withdraw from your TFSA. You can withdraw any amount, at any time, as many times as you want. Of course, the longer you leave your money invested in a TFSA, the more time your investments have for potential growth.

In most cases, you don't have to pay any taxes on a TFSA withdrawal or file a TFSA tax return. However, there are certain situations where you may have to pay taxes on a TFSA. These include:¹

• Excess TFSA amount. If you over-contribute to your TFSA, you have to pay a tax equal to 1% per month on the excess amount. You will continue to pay this tax for as many months as the over-contribution remains in your TFSA.
• Non-resident contributions. At any time during the year, if your TFSA contains contributions made while you're a non-resident of Canada, you may have to pay a tax of 1% per month on these contributions. There are exceptions for qualifying transfers and exempt contributions.
• Prohibited investments: Customers should refer to CRA’s website to learn more about prohibited investments and applicable tax consequences.
• Non-qualified investments: Similar to prohibited investments, non-qualified investments are subject to a tax equal to 50% of the fair market value of the property at the time it was acquired or that it became non-qualified. You may also be liable for the 100% advantage tax on certain non-qualified investment income.

Unlike with an RRSP, withdrawals from your TFSA don't count toward your income for the year. Federal income-tested benefits and credits, including Old Age Security (OAS), the Guaranteed Income Supplement (GIS) or Employment Insurance (EI), aren't reduced as a result of any income you earn in your TFSA or the amount you withdraw.¹

A withdrawal from your TFSA also won't impact your eligibility for federal credits, such as the Canada Child Benefit (CCB), the Canada Workers Benefit (CWB), the goods and services tax/harmonized sales tax (GST/HST) credit or the age amount.

If you withdraw all of your money from a TFSA to fund your wedding or pay down high interest debt, it's no problem. You can start to contribute again as soon as you have the money and available contribution room to do so.

You can also open more than one TFSA if you have more than one savings goal. So, you can designate one for a new car and another to help you save and invest for the retirement of your dreams. Of course, you still have to stick to the total maximum contribution limit.

The flexibility of the TFSA is what drives Canadians to use this account to save for a variety of short and long-term goals, such as:

• Down payment on a house
• A new car
• A family vacation
• Retirement
• Children's education
• Emergency fund

To find out the financial benefits of investing in a TFSA, or multiple TFSA's, use Scotiabank's TFSA calculator.

Contributing to a TFSA is a great way to set aside money for your financial goals, both near and far. In most cases, you can make a withdrawal from your account at any time, for any reason, without paying a withdrawal tax. This gives you the freedom to access your money quickly, should you need it, or to let it grow tax-free into the future.

For more information about tax-free savings accounts, check out our TFSA FAQ.