TFSAs are a great deal for tax-free savings and investments. But over-contributing can get expensive, so it's important to know exactly how to deal with them if they do happen.
TFSA over-contribution penalty
A TFSA is a government-sponsored investment account that doesn’t charge tax on any gains you make from that investment. They should be an important part of anyone retirement plan. Although TFSAs are a great deal, there are some restrictions that you have to keep in mind. The most important is that there’s a limit to how much you can put into your TFSA every year. And there are penalties to pay when you've over-contributed.
Learn more about our TFSA - with no account minimum, you can start with as little as $1
The amount of money you can put into a TFSA every year is called the contribution room, and if you exceed your it, you’ll have to pay a penalty. Any amount you withdraw from your TFSA gets added to your contribution room for the following calendar year, which can mean even more penalties the following year. For 2024, the contribution room is $7,000 (Details are available at Canada Revenue Agency’s site.)
Over-contributions to TFSAs are subject to a 1% penalty tax per month (only on the over-contribution amount). For example, if by October you'd reached your contribution room and then over-contributed $2,000 the rest of the year and did nothing to correct the over-contribution, then you’d have to pay 1% of $2,000 for October, November, and December. That's $2,000 x 0.01 x 3, which means $60 in penalties. You can find a more detailed breakdown here.
Note: While RRSPs give you a buffer of $2,000 with your over-contributions, you get no buffer with TFSAs!
How you know if you’ve over-contributed
If you’ve over-contributed, the CRA will send out an “excess amount letter,” which will instruct you to remove the excess immediately, if you haven’t already done so. You might also receive a “proposed TFSA return", where the CRA calculates the amount of tax you're likely to owe, based on information provided to the CRA by the TFSA holders' financial institutions.
If the information on the proposed TFSA return is correct, then you sign it and enclose the amount you owe. If you think the assessment is incorrect, then you send back a detailed explanation and any additional relevant documentation, along with proof that your excess TFSA amount has been corrected.
Open a TFSA with Wealthsimple and get access to our free TFSA contribution tracker.
How to fix TFSA over-contributions
So you over-contributed to your TFSA. It happens to several thousand people each year. Here’s what you can do:
Make sure you’re regularly checking your account on the CRA website to keep track of your contribution room. But keep in mind that the information in the My Account tab won’t include contributions from the current year. For a most up-to-date overview, call CRA and ask for your TFSA transaction summary, or contact your TFSA provider.
Once you notice you’ve definitely over-contributed, you need to act fast. If you’ve received an excess amount letter, you should withdraw the excess amount immediately by contacting your financial institution and asking them to withdraw the excess. You’ll be charged for each calendar month that the excess is in your TFSA, so even if you’ve only been over your contribution room for eight days in October, you’ll be charged for the month of October.
If you’ve received a proposed TFSA return (also known as form RC243), then fill out the form and send a check for the penalty fee. Even if you plan to appeal, you should pay first. If the CRA accepts your appeal the fee will be reimbursed.
If you think you might have a chance, plead your case. First time this has happened? Did you request a transfer to a new financial institution but it was classified as a withdrawal instead, therefore causing you to mistakenly believe you had more contribution room than you actually did? Send a detailed letter to CRA showing that you’ve taken immediate steps to rectify the over-contribution.
Keeping track of your contribution room is essential, but these rules shouldn’t discourage you from opening a TFSA account. It’s still an incredibly useful and—with some basic organization—simple investing account that has loads of benefits. At Wealthsimple, you can open a TFSA account with us and benefit from our state of the art technology, low fees and the kind of personalized, friendly service you might have not thought possible from an automated investing service.
Last Updated
March 20, 2024
FAQs
The amount of money you can put into a TFSA every year is called the contribution room, and if you exceed your it, you'll have to pay a penalty. Any amount you withdraw from your TFSA gets added to your contribution room for the following calendar year, which can mean even more penalties the following year.
How do I get rid of excess TFSA contributions? ›
“You generally have to withdraw the funds in the year you overcontributed or the following year,” Ball explains. “It will be a regular RRSP withdrawal. So the CRA would charge you withholding tax when you take the funds out. You'll be out the tax until you file your return.
What should you immediately do if you accidentally over contribute to your TFSA? ›
If you have not removed the excess, it should be removed immediately. For information on your current year room limit, go to My Account (for your room limit as of January 1) or complete Form RC343, Worksheet - TFSA contribution room if you have contributed to your TFSA in the current year.
What do I do if my TFSA is maxed? ›
The RRSP, RESP, and other investment options can be backups after you max out your annual TFSA limits.
What happens if gains on the stocks in my TFSA exceed my contribution room am I penalized? ›
Growth on your investments inside a TFSA does not affect your contribution room, and you can take money out when you want, for any reason, without paying any tax. If you take money out, you can re-contribute it the following year, in addition to the annual maximum. There are penalties for over-contributions.
How do I fix excess contributions? ›
There are several ways to correct an excess contribution to an IRA:
- Withdraw the excess contribution and earnings. ...
- File an amended tax return if you've already filed. ...
- Apply the excess to next year's contribution. ...
- Withdraw the excess next year.
The first four months of the year have been referred to as a 'danger zone' for those relying on TFSA contribution room data posted on their CRA account. If you've based your TFSA contributions on “My Account” information, be aware that it may not be accurate.
What happens if I put too much money in my TFSA? ›
If you contribute more than your contribution limit in the current year, you may be subject to a penalty tax of 1% per month, every month the excess amount stays in your account, based on the highest excess TFSA amount in that month. In the case of over-contribution, please consult with your tax advisor.
How do I report my TFSA contributions? ›
Most TFSA holders have no tax payable related to their TFSA investments, and no TFSA tax return has to be filed. However, when TFSA taxes are applicable for a year, Form RC243, Tax-Free Savings Account (TFSA) Return, must be filed by June 30, of the following year.
What's the maximum TFSA contribution? ›
The TFSA provides a flexible way to meet your savings goals. In 2024, the maximum contribution limit for a TFSA is $7,000. Don't worry if you won't be able to contribute the entire amount. Any unused contribution room will carry forward indefinitely into future years.
In 2020, only 8.9% of TFSA holders maximized contributions to their TFSAs, referring to an individual's cumulative contribution room, not the annual dollar amount.
Can I max out my TFSA in one year? ›
The annual TFSA contribution limit for 2024 is $7,000. Your contribution limit starts the year you turn 18 and TFSA's were introduced in 2009. If you didn't contribute to a TFSA between 2009 and 2024 and you were at least 18 in 2009, your total contribution limit could be $95,000.
Is it better to max out TFSA? ›
If you're lucky enough to have the means, it's actually a stellar idea to max out your contributions to both an RRSP and a TFSA. Why not get the most out of tax-advantaged accounts before stuffing money into accounts that aren't tax-advantaged? Otherwise, you're effectively turning down free government money.
How to fix a TFSA over contribution? ›
Once you notice you've definitely over-contributed, you need to act fast. If you've received an excess amount letter, you should withdraw the excess amount immediately by contacting your financial institution and asking them to withdraw the excess.
How do I waive my TFSA over contribution penalties? ›
The CRA can waive or cancel all or part of the taxes if we determine it is fair to do so after reviewing all factors. To consider your request, we need a letter that explains why the tax liability arose, and why it would be fair to cancel or waive all or part of the tax. Learn more about TFSA excess amounts.
What are common TFSA mistakes? ›
The most common TFSA mistake
If cash makes up the majority of the money you have in your TFSA, you aren't doing it right. But don't worry! You're not alone in making this mistake.
What happens to unused TFSA contribution room? ›
Plus, you can re-contribute the amounts you've withdrawn the previous year or years, and your contribution room continues to carry forward. TFSA withdrawals also won't reduce any income-based benefits, including Old Age Security or Employment Insurance benefits.
Can I take all my money out of my TFSA without penalty? ›
There's no limit on how much you can withdraw from your TFSA. Contrary to popular belief, withdrawing from your TFSA is simple and doesn't incur immediate penalties or taxes. Whether you're cashing in on investments or need quick cash, your TFSA is designed for flexibility.
Can you empty your TFSA? ›
Depending on the type of investment held in your TFSA, you can generally 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.
