Tax Free Savings Accounts Facts About Withdrawals and Re-Contributions
The Tax Free Savings Accounts (TFSA) started as a way for residents of Canada to set money aside, tax-free throughout your life time.
You can make contributions and withdrawal funds from your TFSA during the year. The contributions are not tax deductible. The income generated and withdrawals from the fund are not taxable.
All sounds great but what you have to watch out for excess contributions if you withdraw funds and then re-contribute in the same year. From CRA’s website:
Depending on the type of investment held in your TFSA, you can withdraw any amount from the TFSA at any time. Withdrawing funds from your TFSA does not reduce the total amount of contributions you have already made for the year.
Withdrawals, excluding qualifying transfers and specified distributions, made from your TFSA in the year will only be added back to your TFSA contribution room at the beginning of the following year.
If you decide to replace or re-contribute all or a portion of your withdrawals into your TFSA in the same year, you can only do so if you have available TFSA contribution room. If you re-contribute but do not have contribution room, you will have over-contributed to your TFSA in the year.You will be subject to a tax equal to 1% of the highest excess TFSA amount in the month, for each month you are in an excess contribution position.
In 2010 and 2011, Sarah contributed $5,000 to her TFSA. In 2012, she makes another $5,000 contribution to her TFSA. Later that year, she withdraws $3,000 for a trip. Unfortunately, her plans changed and she cannot go. Since Sarah already contributed the maximum to her TFSA earlier in the year, she has no TFSA contribution room left.
If Sarah wishes to re-contribute part or all of the $3,000 she withdrew, she will have to wait until the beginning of 2013 to do so. The $3,000 will be added to her TFSA contribution room at the beginning of 2013.
If she re-contributes any of the withdrawn amounts before 2013, she will have an excess amount in her TFSA and will be charged a monthly tax of 1% on the highest excess TFSA amount for each month that an excess remains in the account.”
In this example if her excess was as of June 2012 her penalty would be $3,000 * 6 month * 1% = $180.
CRA is monitoring these TFSA and issuing assessments for this penalty.
For more information talk to your TFSA issuer or your tax advisor prior to making any re-contributions to ensure you are on side.
CRA website link: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.html?=slnk