It appears that some confusion has developed over the Tax-Free Savings Account (TFSA). Much of the problem may be directly attributed to the name. The word “Savings” seems to imply for most people that the TFSA deposit must be made into a guaranteed interest account. Data collected from Investor Economics reported that as of June 2011 more than $54 billion has been deposited into TFSAs. And as of March 2011 almost 85% of this amount has been placed into daily and term deposit accounts, earning almost no interest.
There is not much tax being saved with interest rates hovering around 1%. And there is not much growth being accumulated for the investor. But maybe this is the goal of most TSFA investors. No, I don’t think so. I don’t think that 85% of TFSA investors wanted such a low interest rate. They were trying to do the best possible with the information they had, but the options were not provided.
The reality is that the TFSA is much like the Registered Retirement Savings Plan (RRSP). These accounts can hold many different types of investments including mutual funds, stocks, bonds and yes, interest bearing accounts. Yet 85% of TSFA investors have opted for an almost non-existent return. Maybe this scenario would have been different if the name had been Tax Free Investment Account. But that’s not going to change so the next best thing to do is educate yourself on your options.
The investment option is not the only area of confusion. There is also confusion regarding the portability and transferability of TSFAs. Yes, you certainly can transfer from one investment to another. This can be done within the same institution or between institutions. The problem is that there is a process set out by the government to complete these transfers. You must follow the correct procedure and sign the appropriate government-approved paperwork.
You cannot simply withdraw your TFSA money from one institution and then walk down the street and deposit your money back into another TSFA at another institution. This is considered a withdrawal from the first institution and a new deposit at the second. When you withdraw money from your TFSA, you cannot make another deposit until the next calendar year unless you have available contribution room. If you don’t have the room then you are considered to have over-contributed and are subject to a penalty tax of 1% per month. There are currently thousands of Canadians in this tax penalty situation.
If you are looking to broaden your investment options within your TFSA you may want to seek professional advice. The TFSA should become part of your overall financial plan. You must integrate this unique savings vehicle into your plan along with other programs such as RRSPs and pensions. The ultimate objective of course is to achieve your financial goals. Speak to your advisor about your options. If you don’t have an advisor you may want to get one. Their job is to recommend investment options to meet your goals, within your risk tolerance and in the most tax efficient manner.
The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.