How Much Can You Put in a TFSA? Contribution Rules

A Tax-Free Savings Account (TFSA) in Canada provides a flexible way for individuals to save and invest. This registered savings plan allows investments to grow tax-free, and withdrawals are also exempt from taxation. The TFSA is a valuable tool for Canadians seeking to accumulate wealth for goals like a home down payment, retirement, or emergencies.

Understanding TFSA Contribution Room

TFSA contribution room represents the maximum amount an eligible individual can contribute without incurring penalties. This room accumulates annually, beginning from the year an individual turns 18 or from 2009, whichever is later. Even if a person does not open a TFSA, their contribution room continues to accumulate each year, carrying forward indefinitely.

To be eligible for accumulating TFSA contribution room, an individual must be a Canadian resident and possess a valid Social Insurance Number (SIN). The annual dollar limit for new contributions is determined by the Canadian government and can vary from year to year, often adjusted for inflation. For 2024 and 2025, the annual limit is $7,000.

An individual’s total TFSA contribution room is the sum of the current year’s annual limit, any unused room carried forward from previous years, and withdrawals made in the prior calendar year. For someone 18 or older in 2009 who has been a continuous Canadian resident and never contributed, their cumulative room as of 2025 would be $102,000. Tracking this amount can be complex due to personal contributions and withdrawals.

The most reliable source for an individual’s TFSA contribution room is their Canada Revenue Agency (CRA) My Account. While financial institutions may provide information, the CRA’s records are the official reference. The CRA’s online information may not immediately reflect current year contributions or withdrawals. Therefore, individuals should verify their available room before making new contributions, especially early in the year.

Impact of Withdrawals on Contribution Room

Withdrawals from a TFSA affect an individual’s contribution room. Amounts withdrawn in a calendar year are added back to the TFSA contribution room, but this re-addition does not occur immediately. The withdrawn amount is restored only at the beginning of the following calendar year.

This timing can lead to unintended over-contributions. For example, if an individual withdraws funds in November and re-contributes the same amount in December of the same year, the re-contribution counts against their available room for the current year. Without sufficient room, this could trigger an over-contribution penalty, even if they simply re-deposited withdrawn funds.

To avoid penalties, careful planning is necessary for withdrawals and re-contributions. Individuals should wait until January 1st of the next year to re-contribute amounts withdrawn in the previous year, ensuring the funds have been added back to their available room. Understanding this rule helps manage a TFSA effectively and maximize its tax-free benefits.

What Counts as a TFSA Contribution?

Various actions count as contributions against an individual’s TFSA contribution room, and understanding these is important for compliance. The most straightforward is a cash deposit into the TFSA. Every dollar deposited directly reduces the available contribution room for that year.

Beyond cash, individuals can make “in-kind” contributions by transferring investments like stocks, mutual funds, or exchange-traded funds directly into their TFSA. For in-kind contributions, the investment’s fair market value at the time of transfer is the contribution amount. This transfer is a deemed disposition for tax purposes outside the TFSA, meaning any capital gains accrued may be taxable in the year of transfer.

Transfers between TFSAs at different financial institutions generally do not count as new contributions if executed as a direct transfer. This involves institutions coordinating asset transfers without the account holder withdrawing funds first. However, if an individual withdraws funds from one TFSA and personally re-deposits them into another, this is a new contribution and utilizes current year contribution room. This distinction is important for managing multiple TFSA accounts or consolidating holdings.

Dealing with Over-contributions

Exceeding the TFSA contribution room carries financial consequences imposed by the Canada Revenue Agency. An over-contribution results in a penalty tax of 1% per month on the highest excess amount for each month it remains in the account. This penalty applies regardless of how small the over-contribution, as no buffer amount is provided.

Upon detecting an over-contribution, the CRA issues a notification, such as an “Excess TFSA Amount letter” or a “Proposed TFSA Return” (Form RC243), informing the individual of the excess and penalty. To stop the monthly penalty, the individual must promptly withdraw the excess amount. The penalty is calculated for each calendar month; even if the excess is present for one day, the full 1% penalty applies.

In certain situations, the CRA may waive or cancel the penalty tax if the over-contribution was due to a reasonable error and the individual took prompt corrective action. Requesting relief requires submitting a detailed written explanation to the CRA. Given potential penalties, regularly monitoring TFSA contribution room through the CRA My Account is important for all TFSA holders.