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Withdrawing from your TFSA or RRSP?

Learn how to avoid costly mistakes whether you're taking out money or paying it back

September 14, 2020  3 min read

2020 has been a very challenging year. If you’re considering withdrawing money from your Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) to cover expenses or pay down debt, you’re not alone. Here’s some important things to keep in mind. 

RRSP Withdrawals

An RRSP’s primary purpose is to help you save for retirement. Your contributions are tax deductible, which means they are pre-tax dollars. That’s important, because if you take out money early from your RRSP, you will need to pay a withdrawal tax (though the First Time Home Buyer Withdrawal and the Life Long Learning Plan are exceptions to this rule).

You may want to explore a line of credit, a personal loan or withdrawing funds from your TFSA instead of dipping into your RRSP. 

TFSA Withdrawals

Your TFSA is meant for short or long term savings goals, and it comes with annual contribution limits. These limits include any unused contribution room from previous years. Unlike an RRSP, TFSA contributions are made with after-tax dollars. That means you can make withdrawals at any time without incurring a tax penalty—and that can help you through a financially challenging time. 

Beware of TFSA over-contributions

The good news is that you will not lose your contribution room from your TFSA withdrawal.  The bad news is that this additional room will not come into play until the next calendar year. When you’re ready to put money back into your TFSA, you have to be careful not to go over your contribution limit for the year. If you take out money in 2020, you may need to wait to repay the funds until 2021 when you have the benefit of the additional room.

CRA over-contribution penalties

Keeping on top of your annual TFSA contribution limit is essential, because the Canada Revenue Agency (CRA) will penalize you if you put too much into your account. The penalty is 1% per month for the amounts over your limit, so it could add up to 12% per year. Register for online access with the CRA to keep track of your contribution room. 

You may also want to talk with your financial team to help keep your savings plan on track.