If you decide to change institutions for your TFSA, when is the best time?
1. Before the end of the year?
2. In the new year before you make your 2019 contribution?
3. Make your 2019 contribution, then make the transfer?
Understanding the ins and outs of Tax Free Savings Account (TFSA) contributions and withdrawals is important to maximize TFSA room, increase tax-free growth, and avoid fees and penalties. I’m happy to outline the considerations, Sandie.
TFSA contribution room is a cumulative concept. In other words, each year, every Canadian who is 18 or older is allotted more TFSA room based on the annual maximum. The annual TFSA limit was $5,000 for 2009 through 2012, $5,500 for 2013 and 2014, $10,000 for 2015, and $5,500 for 2016 through 2018. The 2019 limit increases to $6,000 on January 1, 2019.
So, for someone who was age 18 or older in 2009 when TFSAs were introduced, and has lived in Canada that whole time, assuming they have never contributed to a TFSA, their TFSA room would be $63,500 on January 1, 2019.
TFSA deposits reduce your TFSA room, and likewise, withdrawals increase it. However, TFSA withdrawals don’t increase your TFSA room until the subsequent year, Sandie. TFSA deposits reduce your TFSA room immediately.
Imagine someone has contributed the maximum to their TFSA each year, and the account has grown to $75,000. If they take a $75,000 withdrawal in December 2018, their TFSA room will be $75,000 plus $6,000 as of January 1, 2019. If they take a withdrawal in 2019, they won’t get additional TFSA room back until January 1, 2020.
So, to answer your question on timing, if you take a withdrawal before year-end, just remember that the new room won’t become available until next year, Sandie.
If you take a TFSA withdrawal and recontribute before the new TFSA room becomes available, you may be penalized. TFSA overcontributions are subject to a 1 per cent penalty tax per month. An overcontribution of $10,000 for 12 months would therefore be subject to a $1,200 penalty.
You can make a transfer of a TFSA from one institution to another. Such a transfer does not constitute a withdrawal and does not impact TFSA room, Sandie. Financial institutions have their own transfer forms to implement such a transfer, and there are no tax forms to file with the CRA.
So, this may be the most efficient option to move your TFSA from one financial institution to another without having to worry about TFSA room.
If you want to confirm your TFSA room, Canada Revenue Agency tracks it and can confirm your room as of January 1 each year. They don’t get updates on TFSA accounts from financial institutions mid-year, so remember CRA’s records of your TFSA room is always as of the start of the year in question.
You may be able to transfer your investments “in-kind” between institutions, Sandie, so that your investments at the initial financial institution are transferred directly to the receiving institution. Not all investments are eligible for an in-kind transfer, particularly if they are proprietary investments like mutual funds that are only available at the one institution.
If you have mutual funds in your TFSA, you may want to consider whether there are any deferred sales charge (DSC) fees that will be payable to sell before transferring the cash.
If your TFSA withdrawal is modest, and the amount you plan to recontribute wouldn’t cause you to overcontribute, taking a TFSA withdrawal from one account and recontributing to the other may be easier and quicker than filling out transfer paperwork. Just make sure you’re mindful of your available TFSA room, when it becomes available, and avoid any overcontribution risk.
There’s also the other risk of being out of the markets if you sell and withdraw cash from a TFSA, or you must transfer your TFSA in cash instead of in-kind, but this risk is likely small if the time you’re uninvested is short.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.