Time to Take the Tax Free Savings Account Seriously

The Tax Free Savings Account (TFSA) was introduced in 2009. In 2009 and subsequent years through 2012, the TFSA dollar limit was $5,000 per year. For the years 2013 and 2014, the TFSA dollar limit is $5,500. For anyone who has not yet contributed to a TFSA, that means the contribution limit for 2014 is $31,000.

Since the limits have become substantial, and will continue to grow as the years go by, we must now view the TFSA as a serious savings vehicle. TFSAs are not limited to interest-bearing accounts. 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.

There was some confusion initially about the TFSA. The word “Savings” seemed to imply for most people that the TFSA deposit must be made into a guaranteed interest account. Many were using the TFSA as a bank account. They would deposit money in January and then take it out in July for a vacation. The bank account concept worked very well for these short-term objectives. If your goal is short-term, then an interest-bearing account is probably the best option for your TFSA. If you have a more long-term objective, then you may wish to consider some alternative investments. You are not locked into your interest bearing account unless you signed up for a specific term. Once your term has expired, you are free to transfer your TFSA to another investment vehicle. The process is similar to transferring your RRSP from one institution to another. You must complete and sign government paperwork to effect these transfers. You must follow the correct procedure, or you may find that you have broken some significant TFSA rules and could face tax penalties.

Let’s assume that you have made the maximum contribution of $31,000 for 2014 and then decide that you want to transfer your account. You cannot simply withdraw your TFSA money from one institution and then walk down the street and deposit your money 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 using your TFSA, you may wish to seek professional advice. The TFSA should become part of your overall financial strategy. 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 financial planner about your options. If you don’t have a planner you may wish 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.

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