How do I make withdrawals from my Tax Free Savings Account (TFSA)?

When you use mutual funds and/or segregated funds as with stocks and/or bonds in your TFSA, you can generally withdraw any amount from the TFSA at any time, for any purpose, with no tax consequences. However, you cannot contribute more than your TFSA contribution room in a given year ($5,000), even if you make withdrawals from the account during the year (contact your TFSA issuer for withdrawal info).

Note: Withdrawals (excluding qualifying transfers and specified distributions) from the account in the year will be added to your contribution room in the following year. If you over-contribute in the year, you will be subject to a tax equal to 1 % of the highest excess TFSA amount in the month, for each month you are in an excess contribution position. You don't need to report any contributions or withdrawals you made during the year on your individual tax return.

The following examples are derived from information offered by the Canada Revenue Agency (CRA):

Example 1
In 2009, Connie contributed $5,000 to her TFSA. Further in 2010, she makes another $5,000 contribution to her TFSA from which she later withdraws $3,000 in 2010 for a trip. Unfortunately, her plans change and she cannot go. Since Connie already contributed the maximum to her TFSA earlier in the year, she has no TFSA contribution room left. If she wishes to re-contribute part or all of the $3,000, she will have to wait until the beginning of 2011 to do so. If she re-contributes before 2011 there would be a penalty because she will have an excess amount in her TFSA. Thus she will be charged a monthly tax of 1 % on the highest excess TFSA amount for each month that an excess exists in the account. Therefore her $3,000 will be added to her TFSA contribution room at the beginning of 2011.

Example 2
In 2009, Mark is allowed to contribute $5,000. He contributes $2,000 for that year.

In 2010, Mark does not contribute to his TFSA, but he makes a $1,000 withdrawal from his account (this withdrawal will be added only on his TFSA contribution room for 2011).

Mark's TFSA contribution room for 2011

Source: CRA

Use TFSA withdrawals to delay and increase your CPP payments

New Canada Pension Plan (CPP) rules were phased in starting in 2011.

At age 65 you can begin to get the CPP payments you are entitled to receive. If you draw these payments prior to age 65 you will be penalized by a lesser payment by .6 % per month (up from the former .5 %). By taking CPP at 60 you will reduce your payments by a whopping 36 % per month.

For each month after age 65 that you delay collecting CPP you will get an extra .7 % (up from .5 %). If you wait to age 70 you can receive 42 % higher payments per month (up from the former 30 %). That is a quite a monthly income difference when you subtract the penalized lesser amount versus the higher amount.

Consider using TFSAs to delay your CPP payments. As of January 1, 2012 you can add $5,000 to your TFSA to total contributions of $20,000. Money you earn or withdraw from a TFSA is tax free. Conversely, the sooner you begin withdrawing money from your RRSP or RRIF, the sooner you will pay withholding taxes on the withdrawals. Thus, use your TFSA strategies to push back CPP payments to gain the increased payments later.