TFSA and Deposit Penalties

Seems the TFSA idea is getting misunderstood by a few investors and savers, so let’s wander through a few simple examples. One of my favourites the TFSA two-step.

First, go read TFSA.gc.ca and make sure you at least understand that site and then come back here for our Arithmetic games.

Let’s also remember that as of now (2014) I can put in as much as $5500 into my TFSA this year (2014) (the total of all deposits, cannot exceed this value).

NB: Each of these scenarios makes the naive assumption that you start 2014 with no excess TFSA room transferred from earlier years and no carried over withdrawals from the previous year.

TFSA Scenario 1:

• I put $2500 into my TFSA on January 12th 2014 and buy a money market fund (to make this simple)
• On June 23rd, 2014 my car needed new brakes, so I cashed out $1800 to pay for this job (money taken from my TFSA)
• September 17th, 2014 I find some money and deposit back the $1800 I took out and add another $600 for a total deposit of $2400

Scenario 2:

• January 19th 2014 I deposit  $4766.00 in my TFSA (which is a savings account set up)
• August 19th, 2014 I need some money to pay for my kids’ tuition, so I withdraw $3500 to help pay for fall tuition
• December 1st, 2014 I find some extra money and decide to pay back the tuition money taken out of $3500

Scenario 3:

• February 11th, 2014, I open a new TFSA and deposit $5500 into it (assuming it is a savings account configuration)
• September 3rd, 2014, I need some extra cash for an impromptu vacation and I withdraw $2000 from the TFSA
• January 15th, 2015, I deposit back the $2000 that I took out in September, 2014

Which of these scenarios may leave you with a Penalty for over depositing?

Scenario 1 is OK, because the total amount deposited in 2014 was only $4900 under the maximum for that year.

Scenario 2 is a big NO-NO! Your total contributions for that year would add up to $8266.00 which is WAY over the yearly contribution rate (even though you took out $3500). You may then have to pay the 1% over payment penalty on $2766.00

Scenario 3 is OK, you deposit your maximum in 2014, and if you want to “pay back” any withdrawals, you wait until the next year to do so (and you check with the CRA to see what THEY think your TFSA limit is).

The formula to remember is:

Maximum deposit into your TFSA for year = ( Previous Year Limit Carry over (if more than zero) )
+ ( $ 5500 )
+ ( Identified withdrawals from previous year )

 If you are not sure what your TFSA limit is, check with the CRA first before devising any plans.