The Learning Centre:
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 $5,500 into her TFSA in January of this year in order to top up to the accumulated $52,000 TFSA contribution room for 2017.
She then withdrew $1,000 from her TFSA one month later. Then replaced that $1,000 back into her TFSA in March of this year.
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 current annual limit is $5,500 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 $6,500. So she would have to pay a 1% tax on the additional $1,000 for every month she was over the $5,500 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’ (but know that the accuracy of the amount shown will depend on whether your financial institution has reported your contribution to the CRA—also 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.
For over 40 years, 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 own 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. Find more about us.
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The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy.