As you (my fellow Canucks) probably know by now, the Harper government introduced a new savings vehicle in 2009- the TFSA! TFSA's are great– they grow tax free (that's a beautiful thing!) and you can withdraw money whenever the heck you want.
But can you re-invest money whenever the heck you want?
A youngandthrifty.ca reader wrote in the other day telling me that she received a statement the other day from the Canada Revenue Agency assessing almost $600 interest on what they called an over contribution.
What she did had was $5,000 in a ING (now known as Tangerine) TFSA high interest savings account. She withdrew $5,000 at the end of January 2009, she took that money and opened up a TD bank TFSA account with the same $5000 (likely because she would get more interest, I assume). All was fine and dandy…until June 2010 when she received a letter from the government asking for $600.
Of course she could have used her RRSP – cue the endless TFSA vs RRSP debate – but she thought (as most Canadians d0) that she'd be just fine withdrawing and then investing back into the account. After all, the government has sort of told everyone that the TFSA is the place to put money in the short term because of how flexible it is right?
How did this happen??
It is estimated that over 70,000 Canadians made the same mistake. So she wasn't alone. Even though there was proof that she took that money out and put it in another TFSA vehicle (in the form of bank statements, etc. etc.), the government still counted the $5,000 taken out in January and put back in as a $10,000 contribution.
They billed her for 11 months of interest, which worked out to be 1% of the excess $5000 per month for the entire year. The details on the CRA website are here.
*I am shaking my fist at the Canada Revenue Agency as I type…uh…. thanks for making sure everyone is clear about these rules, Canada Revenue Agency!* They need to slap on this alert button that comes on when you are about to withdraw money from your TFSA account that says: “Are you sure about this? You cannot re-contribute to your TFSA until next year.”
So what do you have to do to avoid this “over-contribution” and to avoid giving the government even more of your hard earned money? The government recently announced that they are going to increase the CPP deductions from our paycheques (yes, even more money off our paycheques)… but I digress.
Okay, the basic TFSA rules in laymen terms are as follows in this easy example:
- Let's say you put in $5000 March 2009
- And then you take out $5000 June 2009
- You can't put the $5000 back in the TFSA until JANUARY 1, 2010.. otherwise, you'll get slapped with a 1% interest on the HIGHEST amount of over contribution PER month that you have over contributed
- You have to keep track of your contribution room
- They won't let you know that you have over contributed until spring of next year- so do your own due diligence
If you realize you have over contributed for this year, here's what you need to do right away:
- remove the excess contribution (get it out of there as soon as possible before they charge you interest for another month!), and
- pay the penalty (yes, I know it sucks.. but it'll suck more when you give another dime to the government)- by filling out the form RC243. This form is due back June 30.
- OR… you can call up Canada Revenue Agency and tell them it was an honest mistake (and have proof) AND took an initiative to fix it. They may waive the penalty because the TFSA is so new and all.
The TFSA continues to be an excellent savings and investment vehicle for Canadians – that thousands of Canadians misuse every year! Despite having nearly $60,000 of investment/contribution room available as of 2018, and countless platforms options such as Questrade and Wealthsimple available for us to invest our money with, we are still managing to screw this up! I even over contributed myself one year! Don't make this mistake (who wants to throw away hundreds of dollars in hard earned cash or investment returns?), instead make sure that you do the annual math if you are taking money out of your TFSA. Of course, if you're fortunate enough to be able to use the TFSA exclusively for long-term savings then you don't have to worry about these pain-in-the-butt penalties coming to take a piece out of your account!
Any other reader stories out there about over contribution? Any close calls? Did any of the TFSA financial agencies TELL you about the risk of over contribution?
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