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If you’ve experienced an investment loss in your TFSA, you may be wondering how your contribution room could be impacted. What if you decide to make a withdrawal afterwards? Mindi Banach, Tax and Estate Planner, TD Wealth, joins Kim Parlee to explain how losses and gains affect TFSA contribution room.
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* Today on Ask MoneyTalk, we answer a question we're hearing around losses inside your Tax-Free Savings Account, your TFSA. Mindi Banach, Tax and Estate Planner at TD Wealth, joins me now to weigh in. Losses are never fun. But let's talk about them and your TFSA. Here's the question. How does an investment loss in my TFSA impact contribution room?
* Losses within your TFSA do not affect your TFSA contribution room. What does affect your TFSA contribution room are withdrawals from your TFSA. It won't affect this year's contribution room, but it will affect next year's contribution room.
- What's interesting to note is that you cannot deduct those losses on your tax return. But on the flip side, if you have a gain within your TFSA account, you don't have to report that gain on your tax return. So again, losses don't affect contribution room, but it will affect your overall investment strategy within your TFSA account.
* Yes, that is an understatement. OK, can we get into an example of what happens if you have a gain or a loss and you withdrew from your TFSA? Just walk us through a couple.
* Yeah, so if you're a Canadian resident and you just turned 18 this year-- let's call him Justin. So Justin turns 18 this year. The 2024 annual TFSA contribution dollar limit is $7,000.
- So let's say Justin contributes the full $7,000 to a TFSA account that he opened and he invests it in stock. He then, unfortunately, has a loss of $2,000 in his TFSA account. Justin would now have a TFSA account balance of $5,000. You take the $7,000 he contributed, you subtract his $2,000 loss, you now have $5,000 left in his TFSA account.
- If Justin then decides to withdraw the full $5,000 from his TFSA account, for 2024, Justin would have zero contribution ability to his TFSA. Because, again, he maxed it out when he originally contributed the $7,000. However, for next year, in 2025, Justin would be able to recontribute the $5,000 that he withdrew in 2024 in addition to being able to contribute the 2025 TFSA annual contribution dollar limit.
- Now, let's change up the example. If instead of having a $2,000 loss, Justin has a $2,000 gain. Now he's going to have a $9,000 account balance. Again, he contributed $7,000, he has a gain of $2,000, now he has an account balance of $9,000.
- If Justin decides to withdraw this year the full $9,000, similar to the scenario when I talked about a loss, for 2024, Justin's going to have zero contribution ability because, again, he already contributed the full $7,000. But for 2025, Justin is going to be able to recontribute the full $9,000 that he withdrew in 2024, so a little bit of an added benefit there, along with and in addition to his 2025 TFSA contribution dollar limit.
* Confirming, once again, that gains are better than losses in all sorts of ways. OK, that's great. Now, you can't deduct losses within your TFSA on your tax return. We've talked about that. But are there options people can consider just so that losses feel less painful? Is there anything else?
* So while it may unfortunately seem painful that you cannot deduct losses within your TFSA, I think it's really more important to focus on making smart investment choices. We tend to see that some clients, they panic, and they end up selling at the wrong time or they cash out when the market dips. And it's important to be a little bit patient and seek the right advice because, ultimately, making a smart investment choice is going to allow you to minimize those losses within your TFSA and grow your savings in the long run.
* So talk to somebody, right?
* Yes, absolutely talk to somebody. Talk to a tax professional. They're going to be able to be the ones that can provide you tailored guidance based on your own unique facts and circumstances.
* Mindi, thank you.
* My pleasure.
* Mindi Banach, Tax and Estate Planner with TD Wealth. And if you have a question, please send it to us at moneytalk@td.com.
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* Losses within your TFSA do not affect your TFSA contribution room. What does affect your TFSA contribution room are withdrawals from your TFSA. It won't affect this year's contribution room, but it will affect next year's contribution room.
- What's interesting to note is that you cannot deduct those losses on your tax return. But on the flip side, if you have a gain within your TFSA account, you don't have to report that gain on your tax return. So again, losses don't affect contribution room, but it will affect your overall investment strategy within your TFSA account.
* Yes, that is an understatement. OK, can we get into an example of what happens if you have a gain or a loss and you withdrew from your TFSA? Just walk us through a couple.
* Yeah, so if you're a Canadian resident and you just turned 18 this year-- let's call him Justin. So Justin turns 18 this year. The 2024 annual TFSA contribution dollar limit is $7,000.
- So let's say Justin contributes the full $7,000 to a TFSA account that he opened and he invests it in stock. He then, unfortunately, has a loss of $2,000 in his TFSA account. Justin would now have a TFSA account balance of $5,000. You take the $7,000 he contributed, you subtract his $2,000 loss, you now have $5,000 left in his TFSA account.
- If Justin then decides to withdraw the full $5,000 from his TFSA account, for 2024, Justin would have zero contribution ability to his TFSA. Because, again, he maxed it out when he originally contributed the $7,000. However, for next year, in 2025, Justin would be able to recontribute the $5,000 that he withdrew in 2024 in addition to being able to contribute the 2025 TFSA annual contribution dollar limit.
- Now, let's change up the example. If instead of having a $2,000 loss, Justin has a $2,000 gain. Now he's going to have a $9,000 account balance. Again, he contributed $7,000, he has a gain of $2,000, now he has an account balance of $9,000.
- If Justin decides to withdraw this year the full $9,000, similar to the scenario when I talked about a loss, for 2024, Justin's going to have zero contribution ability because, again, he already contributed the full $7,000. But for 2025, Justin is going to be able to recontribute the full $9,000 that he withdrew in 2024, so a little bit of an added benefit there, along with and in addition to his 2025 TFSA contribution dollar limit.
* Confirming, once again, that gains are better than losses in all sorts of ways. OK, that's great. Now, you can't deduct losses within your TFSA on your tax return. We've talked about that. But are there options people can consider just so that losses feel less painful? Is there anything else?
* So while it may unfortunately seem painful that you cannot deduct losses within your TFSA, I think it's really more important to focus on making smart investment choices. We tend to see that some clients, they panic, and they end up selling at the wrong time or they cash out when the market dips. And it's important to be a little bit patient and seek the right advice because, ultimately, making a smart investment choice is going to allow you to minimize those losses within your TFSA and grow your savings in the long run.
* So talk to somebody, right?
* Yes, absolutely talk to somebody. Talk to a tax professional. They're going to be able to be the ones that can provide you tailored guidance based on your own unique facts and circumstances.
* Mindi, thank you.
* My pleasure.
* Mindi Banach, Tax and Estate Planner with TD Wealth. And if you have a question, please send it to us at moneytalk@td.com.
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