It’s so important to stay on top of and keep tabs on all the contributions you’re making (or not making) to your TFSA (Tax-Free Savings Account). Indeed, forgetting that you’ve already contributed in January when it’s December could result in fairly stiff fees courtesy of the Canada Revenue Agency. That’s why if you have any doubt about whether or not you made that annual contribution (or if it was the full amount), it makes sense to check in the portal or, even better, call in to confirm how much space you’ve got to contribute in any given year.
It’s one of those low-effort, high-impact moves that could save you quite a significant sum! And I’d encourage investors not to delay because every day that goes by is a day of tax-free compounding that stands to be surrendered. Either way, overcontribution prevention is easy as you look to remove all of the hurdles that could stand between you and a solid TFSA nest egg.
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Keeping track of TFSA fund flows is vital
Of course, it gets that much harder to keep track of things if you’re making numerous withdrawals and contributions in any given year. Indeed, things can get a tad tricky really fast. And if you’re one of the passive income investors leveraging a TFSA for tax-free income, I’d encourage you to go the extra mile for that exact confirmation because a 1% penalty per month can act as quite the gut-punch.
It’s so easily avoided, and it’s a shame to hear of TFSA investors unknowingly overcontributing or misunderstanding the rules. At the end of the day, careful tracking with a spreadsheet is the number-one way to make sure that you’ll never have the chance to skate offside with a TFSA overcontribution. And, what’s more, understanding the rules that come with withdrawing amounts is absolutely vital.
An honest mistake, such as a withdrawal and a contribution to make up for such a drawdown in the same year, could result in a penalty of some form. Whenever you withdraw TFSA cash, you’ll have to keep tabs and wait until the next year before contributing back the amount. Indeed, with careful tracking of fund flows in and out of a TFSA, overcontribution won’t have the opportunity to hit you unexpectedly.
What if you’ve accidentally overcontributed already?
If you do happen to make a mistake in overcontributing in any given year, the best move is to reverse it as soon as possible. That means withdrawing the excess to end the accrual of further interest.
Take the hit to the chin and ensure that it never happens again. In any case, I’m an advocate for keeping it simple, with a $7,000 (or whatever the maximum annual contribution amount is in the future) contribution at some set point in the year, whether it’s the new year, your birthday, or some other day when you make the big contribution (perhaps December for those who like to do things last-minute).
As for the proceeds, I’m a fan of simple ETFs, such as the Vanguard S&P 500 ETF (TSX: VFV), which is possibly the best, low-cost Canadian way to bet on the S&P 500. Sure, it’s more of a tech-tilted ETF these days, but in my view, that’s a good thing, especially considering how much of the upside has been concentrated in tech these days.
So, in short, keep track of your TFSA cash flows! Use notes, a spreadsheet, or anything else, and spare yourself any potential overcontribution penalties. Don’t rely on the CRA portal itself!
