Unlike Registered Retirement Savings Plans (RRSPs), there’s no time constraints for TFSA contributions.
This is because the money you deposit into your TFSA is taxed on the current year's return, when you withdraw the funds, you don’t have to pay taxes … even if the withdrawal includes interest earned (investment income).
Similar to an RRSP, your TFSA has an annual contribution limit which is carried forward indefinitely. The limit for 2020 is $6,000. Unlike an RRSP, you can re-contribute amounts withdrawn, but you must wait until the following year to do so.
Example:
If you withdraw $2,000 worth of contribution in 2019, your maximum contribution for 2020 is $8,000 (2020 contribution limit of $6,000 plus $2,000 from 2019).
If you’re planning to make a withdrawal in the coming months, whether it’s to make an RRSP contribution, renovate your home or go on vacation, withdrawing the funds before December 31st will allow you to re-contribute the withdrawn amounts as soon as 2021, instead of waiting until 2022.
This is an excellent tax planning strategy for taxpayers who want to optimize the income earned on TFSA investments.
For more information on tax planning with RRSPs and TFSAs before year-end, and after, contact us today. We look forward to discussing how these strategies, and others, can help you optimize your unique situation.
TFSA Penalty For Over Contribution
Like RRSPs, the over-contribution penalty for TFSAs is 1% per month on the over-contributed amount. This penalty is calculated on the highest excess amount for the month. Unlike RRSPs, there is no $2,000 grace amount.
The only way to remedy an over contribution is to withdraw it from your TFSA or by paying penalties until the contribution room comes available in the following year.
For help planning your TFSA strategy, please contact us today.