The Tax-Free Savings Account (TFSA) is one of the most powerful tools Canadians have to accelerate their savings. Contributions grow tax-free and, unlike savings vehicles like Registered Retirement Savings Plans (RRSPs), you don’t have to worry about withdrawals being taxed as income when you take money out of the account.
The TFSA also has flexible withdrawal rules that generally allow account holders to pull funds whenever they want and for any reason. But here’s the catch: timing of withdrawals can have an outsized impact on the growth potential of your account. To help you make the most of this wealth-building vehicle, we’ll explore how withdrawals work, the best timing for withdrawals and some potential pitfalls to avoid.
Key Points
- TFSA withdrawals are tax-free and don’t count as income.
- When you withdraw from your TFSA, it does not free up space right away. Wait until Jan 1 to re-contribute unless you know you have room left, or you’ll pay penalties.
- The best time to withdraw is late in the year (Nov/Dec) as the contribution room is added back on Jan 1, helping you to maximize re-contribution.
When Is The Best Time To Withdraw From A TFSA?
For those planning to redeposit money as soon as possible, the best time of year to withdraw money from a TFSA is late in the calendar year (ideally November or December). That’s because your contribution allowance will be reset at the start of the new year, and thus you’ll minimize the wait time that must pass until you can re-contribute funds.
Again, the exception to this guideline is if you still have contribution room remaining from previous years, in which case you’d be able to deposit the withdrawn amount back into your account up to your available maximum.
Why Avoid Withdrawing Early in the Year?
Unless you’re not in a rush to repay withdrawn amounts, you’ll want to avoid pulling out money early in the new year (like in January or February) because you’d have to wait nearly a full year before you regain contribution room. Such a move would limit your financial flexibility and restrict you from reinvesting in your account unless you have unused contribution space available.
When Does It Make Sense To Tap Into Your TFSA?
Keep in mind that, in general, your TFSA works best when you can be patient and you let your money grow tax-free over time. However, there are times when making a withdrawal makes savvy financial sense.
You Need Emergency Funds
If you face an unexpected expense, such as major home repairs, medical bills or a sudden job loss, your TFSA can provide immediate, penalty-free access to much-needed cash. Unlike an RRSP, TFSA withdrawals are never taxed and won’t be seen as income.
Help Pay Off High-Interest Debt
You can use your TFSA funds to pay off high-interest debt, such as credit card bills or payday loans. This is often a much better choice than allowing debt to balloon out of control and potentially damage your credit scores. Just do your best to re-deposit the money back into the account as soon as you’re financially able and have the allowable contribution room.
To Take Profits
It’s generally wise to avoid dipping into your TFSA as the more time your money stays invested, the more it benefits from compounding growth over time. That said, if your investments are doing well and you’re in need of cash, withdrawing from a TFSA can be a good strategy.
Withdrawals, including the profits, are tax-free. Moreover, any withdrawals will be added back to your contribution room in the following year.
To Transfer To RRSP
One of the best times to withdraw from your TFSA is to transfer the money to an RRSP or an FHSA. When you move money from a TFSA to an RRSP or FHSA, you reap two benefits: You’ll boost your future TFSA contribution room, and you can use the RRSP or FHSA deposit to lower your taxable income, reducing your yearly tax bill.
Learn more: How To Transfer An RRSP To A TFSA
TFSA Withdrawal Rules
Unlike with some other registered savings accounts, like an RRSP, a TFSA offers incredible flexibility when you want access to your money. However, while your funds can be taken out tax-free, some caution is required when replacing money you’ve withdrawn from the account to ensure you avoid penalties.
Here’s what you need to know:
No Tax On Withdrawals
All withdrawals (contributions, interest, dividends, capital gains) are tax-free. That means that whether you hold a TFSA as a basic savings account or as an investment portfolio filled with stocks and ETFs, there’s no tax hit when you take money out.
Note: The one main exception to this rule of thumb is if you’re treating your TFSA like a day trading account. A day trader is someone who buys and sells a high volume of stocks frequently over the course of a single day. If the CRA determines that you’re using your TFSA to earn income as would a professional day trader, all profits earned in the account would then be taxed as business income, which could cost you big.
Withdrawals Increase Contribution Room, But Not Immediately
Each year, the federal government sets a new yearly contribution maximum for the TFSA. One of the account’s most attractive features is that whatever amount you withdraw from your account is added back to your overall contribution allowance the following year.
Example
Let’s say you contribute $7,000 (the max allowable amount for 2025) into your TFSA on June 3, 2025. In September of 2025, you withdraw $2,000.
You would not be able to put the $2,000 back into your account until Jan 1, 2026, unless you have unused contribution room.
Note: It’s important to remember that the TFSA has a yearly and lifetime contribution limit. If you haven’t maxed out TFSA contributions each year, the unused room carries forward, allowing you to contribute more than the annual contribution limit.
For example, the current total lifetime TFSA contribution room from 2009 to 2025 is $103,500. If you contributed $50,000 over that period, you still have $53,500 in unused room. That means you can contribute the annual maximum ($7,000) in 2025, plus any unused contribution room ($46,500), which totals $53,500.
Only when you’ve maxed out your annual and accumulated contribution room do withdrawals have to wait until the next calendar year to be replaced.
Overcontribution Fee
If you over-contribute, you’ll be charged a penalty tax of 1% each month on the amount exceeding the allowable amount. Be warned: the CRA takes over contributions seriously and you’ll face a penalty even if you’re only as little as a dollar over the maximum amount.
Things To Keep In Mind When Making A TFSA Withdrawal
Before making a withdrawal from your TFSA, it’s important to have a clear understanding of how you can impact your future contribution room and savings goals. Here are some things to keep in mind:
Check Your Contribution Room To Avoid The Penalty Fee
You can only put withdrawn funds back into your TFSA in the same year if you haven’t already used up all of your contribution room for that year or if you have remaining space from previous year’s deposits. If you exceed your allowable contribution room, you’ll be charged a penalty fee of 1% per month on the excess amount until it’s removed.
A great resource to track your TFSA room is the CRA My Account self-service portal, though keep in mind that the amount stated only reflects prior years’ TFSA records and does not include any transactions that you made in the current year.
Avoid Frequent Withdrawals
While it’s designed to be a flexible savings vehicle and you can make withdrawals at any time and for any reason, a TFSA works best when used for long-term savings goals, such as retirement or a major renovation. Frequent withdrawals will negatively impact the benefits of compounding growth and can leave your portfolio falling short over time.
For things like emergency funds or smaller projects, it’s better to put money aside in a regular or high-interest savings account and leave your TFSA to grow tax-free over the long term.
Learn more: TFSA Contributions: How to Invest For Beginners
How To Withdraw From Your TFSA?
You can withdraw funds from your TFSA mainly in either of two ways:
- In Cash: If your money is invested in a simple GIC or high-interest savings account, you can ask your provider to transfer your money to your chequing account. If you’re invested in stocks, you’ll need to sell those before you can withdraw the funds as cash.
- In Kind: On the other hand, if you don’t want to sell your investment, but simply transfer them to a different account, you can transfer them “in-kind” (i.e. you can transfer the securities without selling them first). You’ll get the fair market value of the securities at the time of withdrawal. This is a more complex process than withdrawing cash, and often banks will require that you contact them to make the transfer.
Bottom Line
While a TFSA is a handy way to make your money grow, there are important timing considerations to keep in mind. The key to maximizing the growth potential of your TFSA is to time your withdrawals (and your re-contributions of withdrawn funds) wisely. Being aware of these strategies lets you avoid costly over-contribution penalties and ensures you make the most of your account’s tax-free growth potential.
