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We often find that the biggest misunderstanding with a TFSA deals with withdrawals and contribution room. Let's illustrate this through an example:

As of 2020 you have never used any of your contribution room and are 45 years old. This means your contribution limit for the year was $69,500, so you make that full contribution and you have now maxed out your TFSA.

By year end, your investment has grown nicely and the value of your TFSA sits at $75,000. However, due to an emergency late in the year, you need to redeem all $75,000...so how much TFSA room do you have now?

For the rest of 2020 you have $0 in contribution room. However, on January 1, 2021, you would have $81,000 in contribution room.

This $81,000 is comprised of the $75,000 that you withdrew in 2020 plus $6,000 of new contribution room...the new annual limit per the CRA.

It's important to understand that 2021's contribution room is related to the money you withdrew ($75,000) not the $69,5000 that you originally contributed.

What if your $69,500 contribution dropped in value to $65,000 in late 2020 when you were needing the money? What would the contribution room be then?

For the rest of 2020 you would still have $0 in contribution room. The change comes on January 1, 2021, where you would have $71,000 in contribution room compared to $81,000 in the first scenario.

This $71,000 is comprised of the $65,000 you withdrew plus the $6,000 in new contribution room.

The lesson from this scenario is if you redeem from your TFSA when it’s at a loss, that TFSA room is permanently lost.

This is a big deal...similar to an RRSP, we only have so much contribution room. The good thing with a TFSA is you are able to earn back the contribution room the following year depending on your investment growth, but any losses are gone forever.

Before you go redeeming money from your TFSA or treat your TFSA like a bank account, consider the contribution room effect of your actions.

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DISCLAIMER: The videos and opinions on this channel are for informational and educational purposes only and do not constitute investment advice. Adam Bornn is not registered to provide investment advice and as such does not provide recommendations those looking for investment advice should seek out a registered professional. Adam is not responsible for investment actions taken by viewers and his content should not be used as a basis for investment trades.

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