TFSA withdrawals: room comes back on January 1, the 1% a month over-contribution tax, and why a few weeks can cost you a year of room
If you've got money in a TFSA and a big expense coming early in the new year, the date you take it out matters more than it looks. A withdrawal doesn't free up room right away. The CRA adds it back on January 1 of the following year. Take it out in December and the room is back in a couple of weeks. Take it out in January and you wait almost a full year.
And if you put the money back too soon, the CRA treats it like any other over-contribution, even though it was yours to begin with.
The rule
A TFSA lets your savings and investments grow tax-free, and every Canadian resident 18 or older builds contribution room each year. The annual limit is $7,000 for 2024 through 2026. If you've been eligible since TFSAs started in 2009 and have never contributed, your total room is $109,000 this year.
Your room each year is the new annual limit, plus any unused room from earlier years, plus whatever you withdrew the year before. That last piece is the one to watch. Withdrawals are added back as contribution room on January 1 of the next calendar year, not in the year you take them out. Investment gains, losses and fees don't change your room either way.
If you put in more than your available room, the excess is taxed at 1% a month for as long as it stays in the account. That includes a withdrawal you're putting back.
How the timing works
Think of each December 31 as a cutoff. Everything you withdraw during 2026 comes back as room on January 1, 2027, whether you took it out in February or on December 30.
So two withdrawals a few weeks apart can land very differently. Take $10,000 out on December 15, 2026, and it's back in your room 17 days later. Take the same $10,000 out on January 5, 2027, and the room doesn't come back until January 1, 2028. That's 361 days.
This matters most when you plan to rebuild the account. Say you're using TFSA savings for a vehicle, a renovation or a big tax bill, and you'd like to start putting money back as soon as you can. A December withdrawal means the room is waiting for you in January, on top of the new year's limit.
But it only works for a withdrawal you already know is coming. If you won't need the money until spring, pulling it early just means it stops growing tax-free sooner.
The fine print
- Putting it back the same year uses new room. If you've used all your room, a re-contribution before January 1 is an over-contribution taxed at 1% a month. The CRA's own example: someone with no room left contributes $7,000, withdraws $3,000, puts it back, and ends up $3,000 over.
- Moving your TFSA? Ask for a direct transfer. When the receiving institution moves it for you, your room isn't affected. If you withdraw it yourself and deposit it somewhere else, that deposit counts as a new contribution.
- Losses don't come back as room. Room tracks dollars going in and coming out. If you put in $10,000, it drops to $6,000 and you take it out, you get $6,000 of room back, not $10,000.
- Ask about the cutoff. If your TFSA holds investments, they may need to be sold and settled before the cash comes out. Ask your issuer what the last day is for a withdrawal to count in 2026.
These are federal rules, so they're the same at a bank, a credit union or any other TFSA issuer. What differs is how long a withdrawal takes and whether there are fees to sell or transfer.
What it looks like in dollars
Here's an example. Say you've used all of your TFSA room for 2027. In February you take out $5,000 to cover a gap, and in April, once things settle down, you put the $5,000 back.
Because you had no room, that April deposit is a $5,000 over-contribution. At 1% a month, that's $50 for every month it stays in, April through December. Nine months comes to $450 in tax on your own money. On January 1, 2028, the February withdrawal comes back as room and the excess is gone.
Wait until January 1 to put it back and the tax is $0. And if you catch it partway through, taking the excess out sooner cuts the bill, since the tax only runs while the money sits there.
Why people miss this
A TFSA can feel like a regular savings account, where money goes in and out whenever you like. Your banking app shows the balance, not your room, so nothing on screen warns you before you put a withdrawal back.
It adds up. The CRA assessed $166.2 million in TFSA excess taxes for 2024, on about 133,000 of 19.3 million account holders.
Try this week
Look at what you've put into and taken out of your TFSA so far this year, and whether you have a withdrawal coming in the next few months. If you do, ask your issuer how the timing works before December 31.
- How much have I contributed and withdrawn in 2026, and do I have any room left this year?
- If I take money out in December, how long does it take, and what's the last day it counts for 2026?
- If I'm moving my TFSA somewhere else, will you do it as a direct transfer?
Is there TFSA money you're planning to use early next year, and does it come out in December or January?
Disclaimer: Education, not advice. These are my personal views, not my employer's. Your situation is your own, so check with a qualified professional before acting.
Sources: CRA, Withdrawing from a TFSA · CRA, Before you contribute to a TFSA · CRA, Requesting a TFSA transfer · CRA, Tax-free savings account limit (2025) · Advisor.ca, TFSA overcontributions led to $166.2M in penalties in 2024
