TFSA Institution Transfer Strategies

by Mike Holman

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You know you are a financial keener if you set up a new TFSA and after 2 months, are thinking about transferring to a different financial institution.  Reader Kim commented on a recent TFSA post that he is thinking of doing exactly that.
Here is his comment:

Great information…and I have $5000 in an ING TFSA.
I was wondering if there are consequences of taking some of the money out of my ING TFSA and opening another TFSA at a different institution that allows Stock purchases in the account rather than just cash? As I understand it, any increase in the value of the stock is tax free which COULD be quite substantial.

This brings up a number of very interesting issues and a couple of possible strategies for transferring TFSA money from one institution to another.

First of all he mentions having $5,000 in his TFSA – since that the annual contribution limit and the TFSA program is in its first year – obviously he doesn’t have any contribution room left for 2009.

TFSA transfer to new financial institution

TFSAs are similar to any other kind of account such as an RRSP – you can do a transfer to a new institution without having to withdraw from the TFSA.  You can either transfer-in-kind which means that any investments in the TFSA get moved over to the new institution – for example if you own shares in the TFSA, they will be moved without having to be sold and then bought again.  Transfer-in-cash means that the investments are sold and only the cash amount is moved to the new institution.

In this case the transfer will be in cash.   As a result of this transfer there will be no withdrawal or contribution to the TFSA.  One thing to be aware of is the transfer fee.  Most institutions charge this fee which is generally $100 to $150.  If you are transferring to a discount brokerage and have sufficient assets then you might be able to get them to cover this transfer fee.  Given that the TFSA only has $5,000 of contribution room, it is unlikely that anyone has enough in their TFSA to get a free transfer (unless of course they have made some incredible trades).  Of course you should check if your institution charges this fee and how much it is.

TFSA withdrawal and contribution strategy – aka “The December Strategy”

Another strategy to think about if you are looking at a steep transfer fee is to just withdraw the TFSA money from the existing account and then contribute it to the new TFSA account.  The TFSA rules state that any withdrawal will result in an increase of the available contribution room by the same amount in the following calendar year.  Assuming that withdrawals are not charged fees (or less fees than the transfer) then someone could do this strategy with the only problem being that they can’t recontribute the money in the same calendar year unless they have enough unused TFSA room which is not the situation in Kim’s case.  This is a valid strategy in December (preferably the end of December) because then you can take the money out, wait a couple of weeks and then recontribute it at the new company.

In a few years, most Canadians will probably end up with a lot of unused TFSA contribution room.  Let’s face it – between mortgages and the RRSP – there is only so much money available for the TFSA.   For those people, there won’t be an issue if they want to move their TFSA – they will be able to just withdraw and recontribute in the same year by using their unused contribution room.

What kind of investments are suitable for the TFSA?

And finally on to the point that I think Kim was actually asking about – should he invest in stocks vs high-interest savings account in a TFSA account for tax reasons?

First of all – the tax considerations should not be the driver of your asset allocation.  The first step should be determining what type of investment (cash, stocks, bonds) you want this money to be in.  The next step is to figure out what type of account (TFSA, open, RRSP) it should be in.

As far as the potential tax savings – it’s hard to estimate without being able to predict the future but here are a couple things to think about:

  • You can’t claim a loss inside a TFSA.
  • 3% interest on $5k at 40% marginal rate will save $60 of income tax per year.  To have an equivalent capital gains tax benefit you would need a 6% return.  Because capital gains tax applies to half of the profit – the rate of return has to be twice the interest rate to break even.  6% stock appreciation is not unreasonable over the long term but will interest rates stay at 3%?
  • Transaction fees for the stocks.  I didn’t include these in my break-even analysis but they would be a factor.  Kim mentioned buying stocks with “some” of the TFSA money – less than $5k is not a lot of money to buy individual stocks with so maybe an index mutual fund would be better.  He should look into TD e-funds for that.

If you are looking for more information on mutual funds, index funds and ETFs then sign up for a Morningstar free account.  Morningstar is the industry leader in investment information.


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{ 24 comments… read them below or add one }

1 Thicken My Wallet

Thanks for the link and the informative post.

2 guinness416

Great post 4P – bookmarked!

3 J

Great post.

I’m probably in the same mindset as Kim and I am still struggling with the points you raise in the final section, not just because I can’t predict the future, but also because I don’t have all the pieces of the puzzle.

Once you determined the types of investments you want to hold based on your time line and risk level, you need to determine in what types of accounts to hold them, in part based on their relative tax efficiency, but also based on their ability to have compounding/tax-deferred growth. Your math looks at just a single year. Would the model change over time?

The TFSA is capped to $5k (indexed) per year, but by putting faster growing investment vehicles in the TFSA, I can push the value held in the TFSA up beyond ( $5k * x years ). Lets look at just my initial $5k TFSA contribution this year and disregard the $5k I will be contributing in future years. In a savings account, at 4%, it would grow to $16k in 30 years, whereas at 6% returns on stock it would grow to $28k. For someone who hopes to max out his TFSA each year, that difference in the space inside the TFSA could result in a substantial difference in the tax bill years from now, when the difference will be a whole lot more than $60.

Assuming the same 40% marginal tax bracket and retirement decades away, certain types of investments seem to be better held in one type of account than another. Ideally I’m looking for someone who has tabulated the pro’s and con’s of placing a particular type of investment in the various accounts over a longer period. What should I consider when holding foreign dividends in a TFSA, RRSP, vs a non-registered account? How about Canadian dividends, REITs, GICs, etc.

I started building a table like this on my own which has more gaps than text. For example for Canadian dividends I wrote: “Dividends are very tax efficient. There are much better funds to put into a tax-sheltered account.” (i.e. I maxed out my RRSP and TFSA this year and when opening a non-registered account these might be among the investment types to consider shifting there.)

I my comment is all a very general. To bring it back to Kim’s question: what would be good reasons to hold equity in a TFSA?

4 Steve in Montreal

I recently opened a TFSA at Questrade. I’m figuring on filling it with income trusts and have their monthly distribution placed into the account. Figuring some are paying 10 to 20% right now, it will be all tax free to take out come December.

5 Four Pillars

Steve – that’s a great plan. I hadn’t thought of using the TFSA that way.

6 Ray

J: That is a good strategy. I personally am planning on using the TFSA as an income producing vehicle, so I’ll be placing investment grade corporate bonds, income trusts and non-Canadian dividend paying stocks.

The plan is to build a passive income vehicle right now it may not be big but over longer time period it will save me a lot on taxes.

I’d rather place Canadian dividend paying stocks in non-registered and take advantage of the tax credit.

I discussed some TFSA strategies in one of my recent posts.

7 MJ

On the thought of foreign dividend paying stocks, check to ensure the country in question recognizes the TFSA, as of today, the US does not, which means any gains on US securities will be subject to witholding tax, whereas RRSP is recognized.

8 I.Pedlar

My understanding is that you can have more than one TFSA.
So, why not just open a second account for buying stocks and avoid any fees associated with collapsing the original TSFA.

9 Four Pillars

I. Pedlar – yes, that is always an option but Kim wanted to use the money in his existing TFSA.

10 Offfff

Don’t know if I’ve done the right thing… I wanted to try this strategy: I’ve invested into 4K in ETF Gold and 1K in ETF Double Oil (that HOU!). For the moment, the performance is significantly negative. Not sure what to do next…

11 Don

Since $5k is not a lot of money (in the investment and retirement world) my strategy would be to invest in a very high risk mutual fund. If I can compound 10 -15% returns over several years, I will accumulate significant funds to withdraw in 25 years, all tax free. Otherwise, I might just as well invest the $5k in my RRSP and reduce my income tax rather than save tax on ($5,000 @ 2.5% earns $125 @40% tax equals about $50 tax). If my risky investment loses 20% in one year (I have lost $1,000) and my TFSA has a face value of $4,000 left in it. If, on the other hand, my risky investment earns 20% my TFSA value becomes $6,000 to which I will add another $5,000 in 2010 and earn return (or losses) on $11,000. I think it’s wise to use this strategy for long term planning as opposed to considering removing the funds from the account in short periods of time. Used wisely, this strategy over 25 years compounded with a 10% interest not indexed will return approximately $545,908 tax free. Using a more conservative return of 6% (not unrealistic) the account would be worth $295,781. As you can see, earning a higher return has significant consequences. Going back to my initial comment, 5k is not a lot of money so if you can afford to gamble with the money, take a chance and if you cant, then don’t. The strategy for TFSA is specific for each individual and you need to be comfortable in the shoes you wear.

12 Canadian Penny Stocks

Good advice to use the money in a Mutual fund. I invested mine in a high yield mutual fund, this way I get a lot of dividends (set them to re-invest) and make money if the stocks go up. I chose the TD high yield income

13 Tummon

While I’ve previously read a lot about TFSAs, these comments have been very enlightening.

I’m 30 and was trying to determine (from a tax perspective) where I should be putting my money for retirement. It probably should have been obvious but the value of growing the $$$ in the TFSA account solely for the purpose of creating as much room as possible in later years never occurred to me.

The true value of a TFSA is really for people who have 20+ years to grow the contribution room and create a sizable tax free, income generating investment for retirement.

14 Justin

Don’t forget that capital gains as well as dividents are all tax free in you TFSA… just something to consider. But good post.

15 Lagune

Note, for those that are interested in precious metals, you can purchase physical gold in a Questrade TSFA. All gold products purchased in stocks or options accounts can be stored at the Royal Canadian Mint or the physical gold can be shipped. Maybe silver soon??

16 Dick

Mine is actually a question: I have not contributed to my TFSA so far, and this year (2011) my contribution limit is $15,000 right? I am inclinded to make this contribution and invest the entire amount in a very high risk stock that I expect will (let’s say a 10-bagger) skyrocket within a year… so assuming I am right and my stock does go up 10 times by December 2011… then my $15,000 invetment would be worth $150,000 — all tax-free as expected.

My question is this: If I sell this stock in December 2011 and make a $150,000 withdrawal from my TFSA account… what would be my 2012 contribution room in 2012?

a) $155,000 (i.e. $5,000 for 2012 + $150,000 withdrawn in 2011), or
b) $20,000

Thank you in advance.

17 Mike Holman

@dick – The answer is a. Now tell me which stock will go up 10x!

18 Dick

Mike, thanks for the quick answer. That’s what I suspected… but now that you’ve confirmed it, I think it makes the TFSAs very attractive. I suppose most people do not have a grasp of these kind of details.

As to the stock tip, let’s just say it was a hypothetical scenario… although I’ve had one or two of those happen in the past (twice with Wi-LAN Inc and once with Cell-Loc…). Now I have to find another :-) for my TFSA!

19 kathleen

hi there, just want to ask if i could withdraw TFSA anytime most especially in times of emergency??? i had my TFSA through bank, can i transfer that let say to my chequing account once i needed the money for emergency purposes??

20 kreug

to piggyback on Dick’s question, same principal…
i contributed 15,000 and bought stocks with it already, there currently down to about 11,000. Say i sell these at a loss (no intentions of claiming it as a loss for tax purposes, i understand that part) and withdraw the money…can i re-contribute the initial 15,000 in the following year or am i now downgraded to an allowable 11,000?
Thanking you in advance!!

21 Mike Holman

@kreug – You will be “downgraded” to $11,000 plus any new contribution room because it’s a new year.

22 Gary D

I have a margin Acc. If i open a TFSA and tranfer some stock to TFSA
what happen’s if one stock has a profit of $500 and
the other has a loss off $500. My limit is $15,000 ??
How does this affect my tax’s. Thank you Great page

23 KarlKarlson

@Kathleen – You can withdraw money from a TFSA at any time, but you will have to be careful not to go over your contribution limit for the year if you decide to put the money back in the TFSA.

For example if your TFSA contribution limit is $5,000 for the year, and you withdraw the $5,000 that you contributed previously for an emergency, you will not be able to put $5,000 back into your TFSA in the same year because that would mean you’ve contributed $10,000 and would therefore be subject to the fees for over-contributing.

24 cc

I currently have multiple existing tfsa accounts, one with Manulife and one with Questrade (trading account). I would like to transfer funds from my Manulife account to my Questrade account to have more funds along with the 5k contribution room next year to buy more stocks in my questrade account. I know I will incur 6% fee in the direct transfer (quite substantial but looking to make up long term in questrade trading account with consistent dividend yield), so I would like to consider withdrawing money from my manulife account and putting in questrade next year instead, since we are approaching end of yr anyway. I am already at the max contribution limit (combined between two accounts), so I would want to know, if I cash out and recontribute in the following year, whether I can only put $ back into Manulife account or whether I can recontribute in Questrade account (ex: taking out $100 from Manulife in 2012, and in 2013 recontribute in Questrade acct already at contrib. limit in 2012) I am not sure if TFSA contribution room is independent between accounts or considered combined as a whole, in which case I would not get the tax penalty. If anyone can clarify or have suggestions, please let me know. Thanks so much!

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