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We have a surprising problem with tax-free savings accounts. Call it over-enthusiasm on the part of contributors.

Canadians are adding too much to their TFSAs and paying big penalties. The system for keeping people updated on their TFSA contribution room could certainly be better, but TFSA holders themselves need to pay more attention to what they’re doing. A good start for many would be to ask themselves if they’re juggling too many separate TFSA accounts.

A penalty of 1 per cent a month applies to excess money added to a TFSA. The total amount of overcontribution penalties paid in 2022 was $132.6-million, Canada Revenue Agency numbers show. That’s more than triple the $41.7-million paid in 2019 and 38 per cent higher than the $96.2-million paid in 2021.

CRA reports that the average penalty in 2022 was $1,461.18, up from $1,239.02 in 2021, $1,063.72 in 2020 and $885.32 in 2019.

“These numbers are really big – and disappointing,” said Julia Chung, a certified financial planner and partner at Spring Planning. “There are a lot of people out there who are still very confused about what TFSAs are and how they work.”

Another aspect of the problem is the way TFSA contributions are tracked by the government, Ms. Chung said. To find your contribution room, you need to log into an online CRA My Account or call the CRA tax information phone service at 1-800-267-6999. Expect to see your contribution room as of the first of the year, including the current year’s amount and unused room accumulated in previous years.

Information on your 2024 TFSA limit may already be posted on your CRA My Account. Don’t expect regular updates to your contribution amount as the year progresses, though. It’s up to you to track this.

There’s an annual contribution ceiling for TFSAs, but your total room in any one year includes unused contribution space from previous years when you were 18 or older. The annual limit has gone from $5,000 in 2009 to $7,000 this year, with a one-time $10,000 ceiling in 2015.

You get tax-free appreciation within a TFSA and, notably, tax-free withdrawals. Money withdrawn can be added back to a TFSA, but you have to get the timing right to avoid the risk of overcontribution penalties.

Ms. Chung’s advice on recontributing to a TFSA: “Wait until the next year. If you took money out in 2024, don’t put it back until 2025.” Note that your 2025 room will consist of the usual contribution amount for the year plus the amount you withdrew previously.

The most recent CRA full report on TFSAs, for the 2020 tax year, shows there were 16 million TFSA holders with 24.3 million accounts. That’s 1.5 TFSAs per account holder, a reasonable number that hides the fact that 14,100 people had accumulated 10 TFSAs or more. Almost 245,000 more people have between five and nine TFSAs.

Managing multiple TFSAs increases the risk of making an inadvertent overcontribution. Also, Ms. Chung says she’s found that people with multiple TFSAs sometimes misunderstand how contribution limits apply to them. The limit covers all your TFSAs in aggregate, not per individual account.

The average size of TFSA penalties suggests that sizable overcontributions are being made and that CRA is taking a while to notify people of their mistakes. If you’re a TFSA investor who routinely makes maximum contributions, a good rule is to monitor both your TFSA room and your contributions at least once or twice a year. This is doubly important if you make automatic contributions each payday or month and also make occasional lump-sum contributions.

CRA will notify you of an overcontribution with an “excess TFSA amount letter.” Included is a calculation of the penalty tax you owe, based on contribution data from the financial companies where you have accounts.

If you find out on your own that you’ve overcontributed, Ms. Chung says you should withdraw the amount immediately. “You might also want to consider calculating what your penalty is going to be and setting the money aside.”

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