In the past, I’ve talked about and given tidbits on how to utilize and maximize the use of a Tax-Free Savings Account (TFSA), but something I haven’t touched on yet is what happens when we overcontribute to our accounts. It’s important that when you are putting money into your TFSA, you double-check how much contribution room you have, and what you’ve been contributing throughout the year to avoid any negative consequences.
Each year in January, the Canada Revenue Agency (CRA) will update your available contribution room based on the previous year’s contributions and the current year’s contribution room. However, any additional contributions made throughout the year will not appear and update on your CRA account until the CRA’s calculations are updated the following January. This is why monitoring the amounts that you contribute throughout the year will save you unnecessary hassle and potentially additional interest from the CRA in the future. To demonstrate, I’ve provided a bit of an example below.
The Scenario
Let’s say that Jane was recently gifted $25,000 from an inheritance in June and thought it would be a great idea to save by investing in her TFSA. Jane went to her bank to deposit the money, and they advised checking her available room before depositing the amount. Jane checked her CRA account and saw that she had $25,500 available room. From here, she advised her bank and then deposited the $25,000 into her TFSA.
The following January, Jane received a notice in the mail from the CRA that she had over-contributed to her TFSA and now owed them interest on the over-contribution amount. What Jane forgot to factor in when checking her available room before depositing the $25,000 was that she was also contributing $500/monthly into her account, and because she checked in June, those contributions hadn’t been reported or updated yet.
With Jane’s monthly contributions, she had already contributed $3,000 into her TFSA for the year, on top of the $25,000 contribution, for a total contribution of $28,000. Based on her original contribution room of $25,500, she had accumulated a $2,500 over-contribution.
Unfortunately, the CRA notice declared that Jane now owed them $175 in interest for the over-contribution.
The Summary
For each month that you have an over-contribution in your TFSA, the CRA charges 1 per cent interest per month on the over-contribution amount. In Jane’s case, she had over-contributed $2,500 over a period of seven months (June – December). You can find a depiction of the formula below.
$2,500 x 1% = $25 x 7 months = $175.
After finding this out, Jane then had to alert her bank to remove the $2,500 from her TFSA, to ensure that she did not incur any additional interest for the year.
The above example highlights the importance of checking your available room, and to also keep track of what you contribute throughout the year to avoid incurring any overcontribution interest. In this example, it was a smaller interest amount owed, but the larger the amount of the overcontribution, the larger the interest amount you’ll owe, which could be a costly expense.
I hope this was a helpful educational lesson on the ramifications of over-contributing to the TFSA. Keep in touch on my Wealth With Julie Instagram for more!
