What Happens to a TFSA Over-Contribution

Saving money in your Tax-Free Savings Account (TFSA) is never a bad idea. One of the perks of living in Canada, aside from its beautiful landscape and friendly citizens, is having the ability to set aside after-tax dollars in a TFSA where it can grow tax-free.

Let’s say you can save some money and not need it for three to five years; this is a great opportunity to grow your savings tax-free. But, what if you weren't 100% sure about your TFSA room and added money to the account anyways. The risk is you may over-contribute to your TFSA, which comes with consequences I will explain below. To better understand how TFSA over-contributions occur, we need to understand how your contribution room is calculated.

Your TFSA contribution room is the total of the current year’s contribution limit, plus any unused TFSA contributions from previous years, plus any withdrawals from the TFSA in previous years. The current 2023 TFSA annual contribution limit is $6,500. (Note - the limit is $7,000 in 2024... this article was originally published in October 2023).

If you have never contributed to a TFSA and you were over the age of 18 in 2009, you can contribute up to $88,000 to your TFSA in 2023. In BC, you must be over the age of 19 to open a TFSA, but your contribution room begins in the year you turn 18.

TFSAs can be a bit tricky when it comes to withdrawals. For example, if in early 2023 you contributed $6,500 to max out your TFSA room, and later in the year you withdrew the $6,500 from your TFSA, you cannot add back the $6,500 until 2024. This means your 2024 TFSA contribution room will be $13,000.

What happens when you over-contribute to your TFSA? The Canada Revenue Agency (CRA) will send you an “Excess Amount Letter” instructing you to remove the over-contribution from your TFSA, and they will charge you 1% of the excess amount for each month since the contribution was made until you correct the situation.

How do we avoid over-contributions? As a best practice we recommend our clients double-check their TFSA contribution room on their most recent Notice of Assessment, or by logging into the CRA online. When checking your contribution limits online, it is important to note that generally the CRA does not update the previous year’s TFSA transactions until well into the following year; sometimes as late as May.

Therefore, we are very cautious about making “extra” contributions before we can confidently depend on the CRA’s accounting. If we have been contributing regularly each year, and we are “on track” with TFSA annual limits, new contributions are generally not a problem. It is just when we are making “top-up” contributions that we recommend confirming the numbers first.

If you ever find yourself over-contributing to your TFSA, or you would like more information on how TFSAs work, please be sure to contact your RGF advisor. The advisors at RGF have a wealth of experience in this field and can easily guide you through the process.

Why do we plan?

Knowing where you are translates into knowing where you’re going, and we hope to provide every client with the trust and confidence to navigate through the waters of their financial lives.

Learn More