How TFSA Withdrawals and Recontributions Work

If you’ve ever pulled money from your Tax-Free Savings Account (TFSA) and wondered when you can put it back in, you’re not alone. This is one of the most misunderstood features of the TFSA—and one of the most common sources of costly mistakes.

The TFSA is designed to give you flexibility. You can withdraw funds at any time, for any reason, and the money you take out is not taxed. But the flexibility ends when it comes to recontributing that amount. If you re-deposit funds too soon, even if they came from your TFSA originally, you can unintentionally over-contribute and face penalty taxes.

Understanding how withdrawals and recontributions affect your contribution room is essential. It becomes especially important if you’re using your TFSA to manage short-term savings goals, making transfers between accounts, or withdrawing to take advantage of market timing.

Why TFSA Withdrawal Rules Matter

Withdrawals from a TFSA are tax-free, which makes it feel like a simple in-and-out account. But the Canada Revenue Agency (CRA) has clear rules for when that withdrawn room becomes available again. If you don’t follow them, you can accidentally contribute more than your allowed limit, triggering a monthly penalty until the excess is removed.

This matters when you:

• Withdraw in one calendar year and attempt to re-contribute before the next.

• Move funds between TFSAs at different institutions.

• Reinvest quickly after a market dip.

• Have automated contributions that resume after a withdrawal.

Without careful tracking, what feels like normal account management can turn into a compliance issue. The key is knowing how and when your contribution room resets.

How Withdrawals Affect Your Contribution Room

When you withdraw money from a TFSA, that amount is added back to your available contribution room—but not immediately.

Withdrawals made in one calendar year can only be recontributed starting January 1 of the following year. Until then, your contribution limit does not include the amount you withdrew.

For example, if you withdraw funds in June, you’ll need to wait until the following January before adding that same amount back. If you recontribute earlier—before your room resets—you’ve technically exceeded your annual limit, even if you’re just replacing what you took out.

This rule can feel counterintuitive, which is why it’s one of the most frequent causes of TFSA over-contributions.

Why Timing Matters

To use your TFSA wisely, it's not just how much you contribute that matters—it’s also when you do it. Here are a few real-world scenarios:

Scenario 1: Early Recontribution

You withdraw $8,000 in August to cover a large expense, planning to re-contribute the same amount in December. Since your room doesn’t reset until January, this December recontribution creates an $8,000 over-contribution—even if you didn’t add anything new.

Scenario 2: Multiple TFSA Accounts

You withdraw from one TFSA and re-contribute the funds to another TFSA held at a different bank later the same year. Even though you’re moving the same funds, the CRA sees this as a recontribution and treats it as an excess if your room is already used.

Scenario 3: Transfers Done Properly

You transfer funds directly between TFSAs through a registered transfer (handled by your financial institution), and no contribution room is affected. This is the only way to move TFSA funds between institutions without affecting your limits.

How to Manage TFSA Withdrawals Safely

The best way to avoid recontribution errors is to treat TFSA withdrawals with a long-term mindset, even when your goals are short-term. Here's how:

Track Every Contribution and Withdrawal

Keeping a personal log—either in a spreadsheet or a financial app—helps you see exactly when and how much you’ve withdrawn. This makes it easier to determine when that room becomes available again.

Use the CRA My Account Portal as a Reference

The CRA tracks your TFSA contribution room, which is updated annually based on reported activity. This is your official record, but it does not reflect real-time activity. For that reason, use it as a checkpoint, not a current ledger.

Wait for the Next Calendar Year to Re-Contribute

No matter how tempting it is to "replace" the money you withdrew, wait until January 1 of the following year. Then, and only then, does your room increase by the withdrawn amount.

Avoid Withdrawing Unless Necessary

While TFSAs are flexible, using them for frequent withdrawals can complicate your contribution tracking. Where possible, consider other sources for short-term needs and let your TFSA continue compounding tax-free.

How Optimize Helps You Navigate Withdrawals and Recontributions

At Optimize, we support your entire TFSA strategy—including managing withdrawals and re-contributions in the context of your broader plan. That means:

• Identifying when it’s appropriate to withdraw funds.

• Reviewing your contribution and withdrawal history to avoid over-contributions.

• Advising on alternatives to early recontributions.

• Helping you coordinate between multiple TFSA accounts or institutions.

Our goal is to help you make the most of your TFSA without facing unexpected penalties or limiting your future contribution room.