TFSA Withdrawal Rules Canada: What Happens When You Take Money Out
One of the TFSA's best features is flexibility. But there's one timing rule that trips people up.
Quick Answer
- TFSA withdrawals are 100% tax-free - no matter how much you take out
- You can withdraw anytime, for any reason
- Withdrawn amount is added back to your room the following January
The TFSA is the most flexible registered account Canada offers. Unlike RRSPs where withdrawals are taxed as income, TFSA withdrawals are completely tax-free. But there's one rule that catches people off guard - and it can cost you.
The Golden Rule: Withdrawals Are Tax-Free
This is what makes TFSAs special. When you withdraw:
- You pay $0 in tax on the withdrawal
- It doesn't count as income on your tax return
- It doesn't affect government benefits (OAS, GIS, etc.)
- There's no penalty for early withdrawal
Contributed $50,000 over the years and it grew to $80,000? You can withdraw all $80,000 tax-free. The growth is yours to keep.
The Timing Rule That Trips People Up
Here's where it gets important. When you withdraw from your TFSA:
The Room Restoration Rule:
Your withdrawal amount is added back to your contribution room on January 1 of the following year - NOT immediately.
This means if you withdraw and re-contribute in the same year, you might accidentally over-contribute.
Example: The Costly Mistake
Scenario:
- January 2026: You have $0 contribution room (fully maxed)
- March 2026: You withdraw $10,000 for an emergency
- June 2026: Emergency resolved, you re-contribute $10,000
- Problem: You just over-contributed by $10,000
The $10,000 withdrawal doesn't restore your room until January 2027. You'll pay 1% per month penalty on the $10,000 excess.
Example: Doing It Right
Correct Approach:
- December 2025: You withdraw $10,000
- January 2026: $10,000 + $7,000 (new room) = $17,000 available
- January 2026: You re-contribute the $10,000
- Result: No over-contribution. You still have $7,000 room left.
How Contribution Room Works After Withdrawals
Let me show you a practical timeline:
- Start of 2026: You have $15,000 contribution room
- March 2026: You contribute $15,000 (room now $0)
- July 2026: You withdraw $5,000 (room still $0)
- January 1, 2027: Room = $7,000 (new) + $5,000 (restored) = $12,000
What You CAN Do with TFSA Withdrawals
TFSA vs RRSP Withdrawal Comparison
| Feature | TFSA | RRSP |
|---|---|---|
| Tax on withdrawal | None | Taxed as income |
| Room restored? | Yes (next Jan) | No (lost forever) |
| Affects benefits? | No | Yes (counts as income) |
| Withholding tax? | None | 10-30% |
Common Mistakes to Avoid
Re-contributing too soon
Wait until January 1 of the next year to re-contribute withdrawn amounts
Not tracking your room
Keep records of contributions and withdrawals. CRA My Account shows your room.
Confusing transfer vs withdrawal
Moving TFSA between banks? Do a direct transfer, not withdraw-and-recontribute.
The Bottom Line
TFSA withdrawals are wonderfully simple: take out any amount, anytime, for any reason, completely tax-free. The only rule to remember is that your room isn't restored until January 1 of the following year.
This flexibility makes TFSAs perfect for emergency funds, short-term savings goals, or supplementing retirement income. Just don't re-contribute in the same year unless you have room available.
Related Guides:
Track Your TFSA Contributions
Waypoint Budget helps you track contributions and withdrawals so you always know your available room.