Dear Nancy Woods,
I have been contributing the maximum amount to my Tax Free Savings Account (TFSA) each year in addition to my Registered Retirement Savings Plan (RRSP). This did not leave me with an extra savings and a rainy day has come that I need some funds. If I need $5,000, which account should I take it out of and how will it affect me? Sharon
Dear Sharon,
If you withdraw the funds from your RRSP for purposes other than as a first-time home buyer or to pay for education costs as a full-time student, then they are considered de-registered and taxable as income. There is a withholding tax deducted at time of the withdrawal. So, if you need $5,000 net, you would need to withdraw an amount that is greater. If you withdraw from the TFSA, the funds are non-taxable and paid to you. If you want to contribute the funds back to either account there are limit restrictions. For the RRSP, there needs to be allowable contribution room based on your previous year's income. For the TFSA, you will need to wait until after Jan. 1 the following calendar year to contribute the funds back. If you do prior to Jan. 1, it would be considered an over-contribution and you will be penalized.
Nancy Woods, CIM, FCSI, is an associate portfolio manager and investment advisor with RBC Dominion Securities Inc. To ask her a question, send an e-mail to asknancy@rbc.com
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