The Canada Revenue Agency has confirmed the TFSA (Tax-Free Savings Account) contribution limit for 2025. Individuals who are thinking of opening a TFSA or already have an account should know about the contribution limit to comply with the rules.
The agency has a contribution limit to the TFSA to ensure fairness in the tax system and prevent any practices that can lead to people reducing their tax bill by contributing more. The Canadians should know the contribution limit to avoid the consequences and complete their responsibility.
TFSA Contribution Limit 2025
The tax-free savings account is a program that began in 2009 for individuals who are 18 years of age or older to save money or invest and withdraw the money with no obligation of taxes. The program allows the citizen to invest their money and secure money for the future.
Many Canadians contribute to the TFSA, but they should know the agency has set some contribution limit on the TFSA so that people won’t get burdened to contribute more and the government can maintain a stable revenue. The contribution people make to the TFSA is not deductible and the income you earn through the investment is not taxable.
The agency announces the contribution limit every year to ensure it matches inflation and that citizens can contribute without any financial burden. The CRA has announced the TFSA contribution limit for 2025 of $7000, the same as the 2024 contribution limit. The $7000 contribution limit has kept the record of the second-highest-ever contribution limit over the years.
How to calculate the TFSA contribution limit?
The CRA determines the TFSA contribution limit based on the indexed inflation rate in the previous year. The citizens take the current year’s TFSA limit, add the unused contribution room of the previous years, and deduct the previous year’s withdrawals to get their contribution limit.
The contribution room of the participant is the total amount of the current year’s TFSA limit, withdrawals made from the TFSA account last year, or the unused contribution room of the previous years.
For instance, you opened the TFSA this year, and you contributed $3000 in the first month, added $2000 later on, then withdrew $1000 and you did not contribute any more in the full year, so next year you can add the withdrawn amount and the contribution limit for the year.
The TFSA account holders can find their TFSA contribution room information on their My Account or cRA mobile app, or by calling the Tax information phone services at 1 800 267 6999. The TFSA participant should know the TFSA contribution grows each year, even if you do not file the income tax.
What happens if you over-contribute to the TFSA?
If the TFSA participant pays over the contribution limit, they have to face the consequences. The over contributed amount will be taxed under the Canadian tax system as your income, for each $1 amount over the contribution limit will be taxed at a rate of 1%.
The 1% taxes each month depends on the highest TFSA contributed in your account each month, meaning the 1% tax rate applicable for a certain month even when the overpaid amount is withdrawn in the same month.
So, savers should know if they wish to take advantage of the tax-free savings account they must keep the contribution limit in mind otherwise it would be no use as the excess amount will be taxed.
What are the TFSA Withdrawals Rules?
The Canadian savers who have opened the TFSA should know the withdrawals from TFSA depend on the type of investment you hold into TFSA. However, the savers should know transferring TFSA to your other TFSA is not a withdrawal.
If you are considering withdrawing from TFSA, you should know the TFSA withdrawal rules to ensure you comply with the rules:
- The withdrawal from the TAFSA did not reduce the contribution amount you made for the year.
- The TFSA account does not have any limit on withdrawal, so the participants can withdraw any amount whenever they wish from TFSA.
- The withdrawal money for the TFSA account is tax-free income, so you do not have to worry about paying taxes on this.
- If you wish to contribute the amount you have withdrawn from the TFSA, you must wait for a year to contribute to the account.
The CRA advises the TFSA participants to withdraw money when they need the large amount, otherwise, they should let it grow. So, if you have some big expenses in the coming year, you should withdraw before 31 December 2024. With this approach, you can reset your contribution room for the 2025 year and the withdrawal amount will be added to your contribution limit.
When do you have to pay taxes on TFSA withdrawals?
The TFSA money is not taxable, however, there are certain conditions where the individuals have to pay taxes, such as:
- When you contribute excess and withdraw the amount in the same month you are required to pay taxes with a 1% rate.
- When you invest TFSA money through a prohibited investment, you have to pay taxes on the investment, hence, the participants are advised to read the TFSA investment guidelines carefully.
- When non-residents contribute to the TFSA, they have to pay taxes on contributions at a 1% rate.
- When the TFSA participants made non-qualified investments subject to taxes, they may have to pay taxes on the market value for the non-qualified investment, where the tax value can reach from 50% to 100% in some cases.
TFSA is a great investment tool to save and grow money for Canadians who have attained the age of 18 or above and have valid SIN, however, the participants should keep the contribution limit for each year in mind to manage the account well and avoid tax consequences.