Which statement about TFSA withdrawals is true?

• A. TFSA withdrawals are tax-free.
• B. TFSA withdrawals are taxable as ordinary income.
• C. TFSA withdrawals reduce government benefits.
• D. TFSA withdrawals can never exceed contribution room.

Answer: (D)

TFSA withdrawals are tax-free. Taking money out of a Tax-Free Savings Account does not trigger any tax or count as taxable income, which is why these accounts are designed for flexible, tax-efficient saving and spending. This tax-free nature also means that withdrawing funds doesn’t reduce any government benefits that are based on income or assets.

Another important point is how TFSA contribution room works. You can withdraw any amount up to what’s in the account, including any investment growth. Those withdrawals don’t affect your current year’s contribution room; instead, the amount you withdraw is added back as eligible contribution room in the following calendar year. Because a TFSA balance can include earnings, it is possible to withdraw more than you originally contributed, so the idea that withdrawals can never exceed contribution room isn’t accurate.