If you have a Tax Free Savings Account (TFSA), you’ve probably been tempted to withdraw some money at some point.
Related: Hidden Advantages of the TFSA
There are no penalties for a withdrawal, the amounts withdrawn get added to the contribution room the following year and if you use a discount broker that is connected to your bank accounts like I do, you know how easy it is to make the withdrawal.
It literally takes less than 2 minutes to make a withdrawal and the money magically appears in my bank account in around 2 days.
My Current Situation
Right now I have some household expenses coming up and I’m considering using the funds in my TFSA to help pay for them.
I know this goes against everything a diligent saver (and investor) should do, but it’s almost too easy to take money from my TFSA.
My wife is a teacher and she gets paid for two months in June, but none in August. So from the end of July until the end of September she will not get paid.
Usually this isn’t a big deal, but this summer has been expensive – new furniture for the home office, a couple of bookshelves for our living room and a new fence for the backyard. Add it all up and we’ve spent $2,500 on our house this summer.
The worst part is that I can justify the withdrawal to myself by saying that the money will be added next year, so I can always catch up next year when more funds are available.
How I Avoid the Temptation to Make Withdrawals
Since it’s so easy to withdraw money from my TFSA I’ve had to stop my brain from giving in to the temptation of taking the money.
I have successfully (so far) avoided the temptation by spreading out the expenses over a longer period. I know that doesn’t decrease the cost, but I’m much less likely to feel the need to withdraw money if I have a few $800 expenses rather than one big expense of $2,500.
All the smaller amounts do add up, but it helps with our monthly budgeting if we don’t get dinged with one big expense. This becomes even more important in the summer when my wife has an irregular pay schedule.
I’ve also avoided the temptation by automatically increasing the savings amounts for the following year to put the money back into the TFSA. After all, it’s only fair that the withdrawals are put back the following year when the contribution room is available.
These two things have helped me avoid making a hasty decision to take money out of my TFSA.
Do TFSA Withdrawals Make Sense?
I think withdrawals from a TFSA make sense in certain situations. For example, a family emergency or unexpected house repair bill that can’t be avoided. Those situations are rare though, and I don’t think a TFSA should be used as a savings account that is readily available to be spent.
Other situations where a withdrawal might make sense are if the money is used to pay down debt, especially high interest loans, or if other debt needs to be repaid.
Conclusion: Even though I have some large house expenses coming up I’ve successfully avoided withdrawing money from my TFSA. It’s tempting because it’s so easy to make a withdrawal but I think a TFSA should not be used as money that’s available for day to day expenses.
Do you make withdrawals from your Tax Free Savings Account? If so, do you ever put the money back?