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Have you ever heard the expression, “if it’s too good to be true, it’s too good to be true” ?
While TFSAs are amazing, and almost too good to be true for that matter, there is a limit to how much you can invest in it each year.
I commonly hear, or read online, people wondering how they can check their TFSA limit (Contribution Limit), as they want to ensure they don’t over-contribute.
Checking your TFSA Limit is a very quick and easy process, but like anything, you first need to know how!
Here is how you can check your TFSA Limit:
Step 1 – If you haven’t already, register for your CRA online account.
Step 2 – Login to your CRA online account
Step 3 – Scroll down to the bottom of your homepage.
Step 4 – Look at the amount assigned to your “TFSA Contribution Room”.
Step 5- Using a calculator, subtract all your TFSA deposits, since January 1st of the current year, from your TFSA Contribution Room.
Step 6- This value is your TFSA contribution limit as of today.
Your current TFSA limit is amount you’re left with after you subtract current year’s deposits from your Contribution Room given to you by the CRA.
In other words, this is how much more you can contribute in your TFSA until December 31st.
If you haven’t contributed any money to your TFSA in the current year, you can skip step 5 and the value you see on your CRA online account is your current TFSA limit.
This is how much more you are allowed to contribute within your TFSA account until next calendar year.
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Why Should You Check Your TFSA Limit?
Like a lot of great things, there is a limited amount of awesomeness that can be had.
While TFSAs are in fact great, if you are a regular investor, you won’t be able to invest your entire portfolio into a TFSA account.
Wouldn’t that be nice though! It may take a few more years for new roads and bridges to be built, but hey what do I care, where am I going.
Kidding aside, it is important to check your TFSA limit from time to time as over-contributing will cost you.
What is the TFSA Over-Contribution Penalty?
In short, over-contributions to TFSAs are subject to a 1% penalty tax per month.
It is important to note that the 1% penalty is only on the over-contribution amount.
For example, let’s say your TFSA contribution limit for the year is $9,000 but your total contribution is $10,000 – your 1% tax penalty is only on the $1000 over-contribution amount, not the entire $10,000.
Quick Note #1 – You are allowed to over-contribute to your RRSP by $2000 but this buffer is not available when dealing with TFSAs – tough crowd hey, like they’ve never made a mistake!
Here’s a simple example of how the penalty tax works.
My total contribution limit for my TFSA is $20,000.
On the 15th of each month, starting in January, I contributed $4,000 dollars into my TFSA.
January 15th – $4,000
February 15th – $8,000
March 15th – $12,000
April 15th – $16,000
May 15th – $20,000
June 15th – $24,000.
Clearly, on June 15th, I am over my annual contribution limit by $4,000.
The CRA informs me on the 16th of June that I am over my contribution limit for the year and I decide to stop making regular contributions.
If I act fast, and withdraw at least $4,000 before July 1st, I would only have to pay a $40 ($4000 x .01) tax penalty.
If I fail to act fast and don’t correct my over-contribution, I will be charged $40 for each month I am carrying the over-contribution limit, until year end.
My total tax penalty, if I never withdrew my over-contribution at all, would be $280 ($4000 x 1% x 7 months).
The Canada Revenue Agency also does an awesome job of further explaining how over-contribution penalties are calculated with TFSAs.
While you might not think 1% a lot, depending on how many months you have left in the year and how much you’ve over-contributed, it can really add up. Not to mention the opportunity costs of putting your money somewhere else!
Related Financial Geek Article: TFSA Advantages and Disadvantages (6 of Each)
What Should You Do If You Over-Contribute to Your TFSA?
We all make mistakes, heck, I’ve probably made six spellings errors in this post alone!
Okay, so let’s say you haven’t listened to a word I have said thus far (wise move) and you’ve over-contributed to your TFSA account.
What should you do next?
By the way, I should mention, and trust me when I say this, the CRA will let you know if you’ve over-contributed.
Depending on what your communication settings you have set for your CRA online account, you will either be emailed or sent a letter.
The government will get the money they are owed, you can be sure of that. And rightfully so!
The point being, don’t think they won’t find out even if you’ve over-contributed by a few hundred dollars, they will, they always do.
So back to the main point, what should you do if you over-contribute to your TFSA account?
Pretty simple actually, just withdraw the amount that you’ve over-contributed.
Your CRA notice will include the amount you’ve over-contributed, so just withdrawal at least that amount from your TFSA account, pay the fine, have a drink, move on.
But don’t procrastinate on making your withdrawal, do it quickly.
At the very least, make the withdrawal before the next calendar month hits to avoid the penalty tax for that month.
Quick Note #2 – If you have a legitimate reason for accidentally over-contributing, such as changed banks or switched to a different investment firm, you can appeal your case and potentially be reimbursed.
While this is a good idea if you have a legitimate case to plead, I would highly recommend first paying the fee and correcting your over-contribution while you’re waiting to hear back.
Trust me, it will save you a lot of hassle.
If you are disciplined enough to regularly contribute to your TFSA, you are ahead of most Canadians!
And if you are nearly maxing out your TFSA each year, then ever better. This requires financial sacrifice and discipline which you will thank yourself for later.
While generating tax-free returns is awesome, you have to be careful not to get too excited and over-contribute to your TFSA or the CRA will issue you tax penalties based on your over-contribution amount.
If you do happen to over-contribute and you get notified by the CRA, just relax and realize there is no need to panic. You aren’t going to jail!
Believe it or not, while you shouldn’t make a habit of doing it, it’s actually not a huge deal.
For one, chances are if you can max out your TFSA then you financially stable and paying a relatively small tax penalty won’t put you under water (unless you really went crazy).
But just make sure you withdraw the amount you’ve over-contributed and pay your tax penalty as soon as possible.
Checking your TFSA limit is not hard.
While you shouldn’t obsess over it, you should definitely check it on occasion to determine how much more you can contribute for that calendar year, and to ensure you haven’t already over-contributed.
As long as you have a CRA online account, you can subtract one number from another, and you can spare 3 minutes, you can check your TFSA limit very easily.
How to Open a TFSA with Wealthsimple (4-Step Guide)
If you are interested opening up a TFSA for yourself, check out The Financial Geek’s Step-by-Step Guide on how to do so with Wealthsimple.