TFSA Master Class – Lesson 2: How to avoid the over-contribution confusion
Let’s start this next lesson with a pop quiz to test your TFSA ‘over-contribution’ knowledge.
Sarah-Jane deposited the maximum annual contribution limit of $6,500 into her TFSA in January of this year in order to top up to the accumulated $88,500 TFSA contribution room for 2023.
She then withdrew $1,000 from her TFSA one month later. Then replaced that $1,000 back into her TFSA in March.
Did Sarah-Jane exceed her TFSA contribution limit for this calendar year?
If you answered no, you wouldn’t get a passing grade unfortunately. Because according to the Canada Revenue Agency (CRA), Sarah-Jane did indeed go over her contribution limit.
Confused? You are not alone.
The number of Canadians who over-contribute to their TFSA is substantial. Knowing the rules will keep you safe from receiving an unwelcome bill from the CRA.
To avoid the TFSA over-contribution penalty, let us provide you with clarity on the subject.
The 2023 annual contribution limit is $6,500 and you can withdraw those funds (and any interest or capital gains) without being taxed. However, if you have maxed out on the accumulated contribution room and want to re-contribute any amount of the TFSA funds you withdrew within that same calendar year, the CRA would charge you a 1% tax per month for every month you’re over the limit.
In the case of our Sarah-Jane example, the CRA would view it as a calendar year contribution of $7,500. So she would have to pay a 1% tax on the additional $1,000 for every month she was over the $6,500 annual limit (i.e. 1% of $1,000 x 10 months = $100 TFSA tax from the CRA).
Where this 1% tax could become really costly is if you were to transfer a large sum of money into your TFSA without knowing about the over-contribution rules.
Of course you can always call and speak to an Educators financial specialist to clarify any questions you may have about how to avoid over-contributing to your TFSA. Knowing your available contribution room is always a good place to start. If you’re unsure about your available TFSA contribution room, you can verify this on the CRA website when you sign in under ‘My Account’. You should know that the accuracy of the amount shown will depend on whether your financial institution has reported your contribution to the CRA, and that recent contributions may not be reflected on the page yet.
You can also call the Tax Information Phone Service (TIPS) for the amount of unused TFSA contributions as of January 1st of the current year. This service is available 24 hours a day, 7 days a week from mid-February to the end of December.
The more you know, the better off you’ll be—hence the importance of financial literacy.
Since 1975, Educators Financial Group has been educating education members where their finances are concerned. So if at any point you’re still unclear when it comes to your TFSA, be sure to reach out to one of our financial specialists. Since we understand everything from pay grids and pension contributions to all the other details that are unique to the education community, we can provide you with the kind of advice that truly speaks to where you are in order to get you to where you want to go.