When the TSX shed more than 400 points last Tuesday as fresh U.S. military strikes in southern Iran collapsed hopes for a near-term Hormuz reopening, a specific sequence began playing out in client accounts across Canada. Clients logged in, looked at their TFSA balances, and in many cases moved money to cash or money market funds. Some withdrew entirely.
The withdrawal itself is not the problem. The problem is what happens next.
Prospect Theory and the Withdrawal Trigger
In 1979, Daniel Kahneman and Amos Tversky published their foundational prospect theory paper, establishing that individuals experience losses as roughly twice as painful as equivalent gains are pleasurable. A portfolio that drops 10% does not feel like a 10% setback. It feels like a 20% loss. The asymmetry between pain and pleasure creates a predictable decision: reduce exposure, move to safety, stop the bleeding.
This is not irrational. It is the rational operation of an emotional system evolved for a different environment. The problem is that in financial markets, acting on that impulse converts a temporary drawdown into a permanent one. The investor who sold into the TSX's Tuesday decline at 34,000 locked in a loss that a holder did not incur. That sequence has repeated across every major geopolitical shock in market history.
The chart above shows TSX composite closes from January through May 2026, with the Hormuz closure event band and Tuesday's decline marked, set against the prior recovery trajectory from March to late May.
The TSX recovered more than 4,000 points between the Hormuz closure low and May 25 before Tuesday's 471-point drop on renewed U.S. military action; the decline does not erase the recovery but creates the conditions for the withdrawal-and-recontribute mistake in TFSA accounts.
Where the Mistake Happens
The specific error is not the withdrawal itself. TFSAs allow tax-free withdrawals at any time, and an investor who needs liquidity or wants to reduce risk has the right to use that flexibility. The error is the recontribution: the client takes money out in May, parks it in a high-interest savings account outside the TFSA, watches markets stabilize or recover, and then puts the money back before December 31, believing the contribution room is still available.
It is not. CRA rules are precise on this point: amounts withdrawn from a TFSA are only added back to available contribution room on January 1 of the following calendar year. A client who withdrew $20,000 in May and recontributes $20,000 in October has overcontributed by $20,000, even if their cumulative room comfortably exceeds their balance. The 1% per month penalty begins accruing immediately and continues until the excess is removed or new room becomes available the following January.
What makes 2026 a particular risk year is the combination of two factors: the Hormuz-driven volatility that triggers the withdrawal impulse, and tightening CRA enforcement. Digital reporting from financial institutions now flows directly to CRA systems in near-real time, and the agency has signalled that penalty notices will arrive within months of the violation rather than the one-to-two-year lag that made the overcontribution mistake feel less consequential in earlier years.
The Recency Bias Layer
Richard Thaler's work on mental accounting adds a second behavioural layer to this scenario. Investors do not treat all money identically. The TFSA is often coded in a client's mental ledger as a specific-purpose account, separate from RRSP money and non-registered money. When that account drops in value during a geopolitical shock, the psychological response is not just loss aversion but a kind of account-specific alarm: this designated pool is being eroded.
The result is that TFSA withdrawals during market stress tend to be disproportionately large relative to the actual portfolio impact, because the client is responding to the account-level loss rather than the portfolio-level loss. An investor whose overall portfolio is down 6% may withdraw 100% of their TFSA because the TFSA is the account they watch most closely and feel most directly.
The recontribution mistake follows predictably. The client who withdrew because they were alarmed is the same client who will recontribute when the alarm fades, without pausing to verify whether the calendar year has reset their room. The behavioural impulse that drove the withdrawal is the same impulse that drives the premature recontribution.
The Room Calculation Is Not Intuitive
The $109,000 cumulative TFSA room figure available to Canadians who have been eligible since 2009 and never contributed adds another layer of risk. Clients with large unused room often believe, incorrectly, that they have limitless flexibility because the headline number is large. The room calculation, however, is not simply cumulative room minus current balance. It requires accounting for prior-year contributions, prior-year withdrawals, and the one-year lag on withdrawal recovery.
A client who has $109,000 in cumulative room, contributed $80,000 over the years, withdrew $15,000 in 2025, and contributed $5,000 in January 2026, has available room of $29,000, not the $15,000 reflex answer or the $109,000 headline. The CRA's My Account portal displays this calculation but only after financial institutions have reported, and reporting is frequently delayed in the first half of the calendar year. The portal is least reliable precisely when it is most consulted.