Use this win-win TFSA strategy before Jan. 1 to maximize earnings and grow contribution headroom

Tax Season 2024 is nigh, and experts say holders of tax-free savings accounts (TFSAs) need to look at several strategies before the champagne is popped on Jan. 1.
Rolled out in 2009 by the Canada Revenue Agency (CRA), a TFSA lets Canadian residents 18 and older to save and hold qualified investments, along with any interest, capital gains and dividends you earn, tax-free.
Qualified investments include cash, stocks, bonds and mutual funds. Every year, the CRA decides the contribution limit or the maximum amount a TFSA holder can contribute in any given year.
Much like a registered retirement savings plan, unused contribution limits are carried forward and added to your contribution headroom in subsequent years. 
Tax-free growth is a major draw of the TFSA. What’s more, Ian Calvert, vice-president and principal at HighView Financial Group in Toronto, says you can get even more value out of your TFSA through strategic withdrawals in December.
If, for example, your start-of-the-year $1,000 TFSA investment has grown to $5,000 by year end, you can withdraw the gain (or whole amount) to “crystallize that TFSA room moving forward,” says Calvert. In other words, whatever amount you take out in December frees up that contribution headroom by Jan. 1 — on top of the 2025 TFSA limit of $7,000, growing your lifetime contribution room by $12,000.
Cindy Marques, a certified financial planner and director at Open Access Ltd. in Toronto, says strategizing your withdrawals is an especially smart move for investments with short-term time horizons of less than two years.
While Marques typically recommends maxing out your group RRSP if you have one, front-loading your TFSA with the rest of the money you intend to invest instead can “create a nice, big tax deduction for yourself. 
“Once you’re pulling money out of the RRSP, you won’t get that room back. So you could just be wasting your room for nothing. You’re going to deal with withholding taxes up front as well,” says Marques. “Worst-case scenario, you’re going to get all of that TFSA contribution room back if you change your mind a couple of days later in January.” 
Also make sure that all your TFSA holdings are indeed qualified investments, say Calvert and Marques. According to the Government of Canada website, collectible rare coins and banknotes, and cryptocurrency, such as bitcoin, are not qualified investments.
And be mindful that you haven’t over-contributed to your TFSA. While you can review your contribution headroom through your CRA account, Calvert says that the figure posted online might not be accurate due to a lag between information flowing from your financial institution to the CRA.
And there is a price to pay for overcontribution. The CRA levies a one per cent penalty tax equal to the highest excess amount for every month that the overcontribution stays in your account.
“My suggestion is to have your own record of contributions and withdrawals over the year,” says Calvert. “If you’re working with a financial institution or a financial adviser, have them reconcile the history of your TFSA just to confirm.” 
Lastly, check that your TFSA has a named “successor holder” in addition to a beneficiary. While a beneficiary inherits the funds in your TFSA without inheriting the account itself, the successor holder (or successor) takes over the TFSA with the funds still held in it. Marques says only a spouse or common-law partner can be named successor holder, while spouses, common-law partners, relatives or other nonrelatives can be designated as your TFSA’s beneficiary. 
“It’s common to see that a beneficiary is set up on the account, but not necessarily the successor holder for some reason,” says Calvert. He adds that, ideally, you should add a successor holder as soon as you’ve opened a TFSA. But it’s never too late if you haven’t already.
“It’s been sort of an administrative miss over the years.”