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Right Now Is the Best Time to Transfer Your TFSA

Your TFSA is a powerful investment tool. It’s more flexible than an RRSP, even though you don’t get a bigger tax refund for contributing to it.

It lets you grow your money completely tax-free. It gives you access to your money at any time, without consequences. It can act as a super emergency fund, if you have lots of contribution room.

The reason it can be ok to use your TFSA as your emergency fund is the same reason you can withdraw your investments without penalty: contribution room resets every year.

Every January 1st, you get additional contribution room from the government – in 2019 it’s $6,000 – but you also get back room equal to your withdrawals from the previous year.

What does that mean?

Your TFSA contribution room is calculated as:

[Withdrawals from the previous year] + [New room for this year]

 

Resetting Contribution Room

Let’s say you have a TFSA value of $60,000. That would be possible ifyou maxed out your contribution room by investing $57,500 and your investments grew by $2,500.

Next year, 2019, you would get an additional $6,000 in contribution room. For all of 2019, you could only contribute $6,000.

But what if you used your TFSA as a down payment in 2018? Imagine you withdrew all $60,000 to use as a down payment on a new home. In 2019, you would have $66,000 in contribution room – the sum of your withdrawals from the previous year, plus the new year’s room.

 

Moving Your TFSA

During the year, you may decide that you want to keep your money in a TFSA, but aren’t pleased with your current account. You can take your money out of a TFSA easily, but remember you only get the contribution room back on January 1st of the following year.

So if you had $60,000 in your TFSA but wanted it at another institution – maybe to get the best TFSA savings account – you couldn’t withdraw the money and deposit it in a new account.

The only option is to do a TFSA transfer, which doesn’t count as a withdrawal. You can transfer TFSAs at any time, but there may be a cost.

Besides that, not every TFSA can hold the same investments. Some institutions, like Tangerine, only allow their own funds in a TFSA. You can’t transfer them in or out. The only option would then be to sell your investments first, then transfer the cash to your desired account, and finally purchase investments from within that account.

Seems complicated, huh?

Not only that, but you have to pay a transfer fee as well! That means you might pay a bank to sell your investments for you.

Some banks may cover the transfer fee for you if you transfer enough, such as $25,000. But what if I told you there’s a free, easy way to transfer as much or as little money from your TFSA as you want?

 

Wait until the end of the year

Let’s say you only have $3,000 of contribution room left for 2018. Next year, you would get $6,000 of room, for a total of $9,000 for 2019.

But if you want to move $10,000 or more, you can’t withdraw then deposit – you don’t have enough room. Not only that, but you also wouldn’t be able to make any new contributions!

The answer is simple – withdraw as much as you want on or before December 31st, then deposit it wherever you like!

TFFSA contribution room resets on January 1st every year, no matter when you made a withdrawal. By waiting until the end of December to move your money, you can avoid all transfer fees! You’ll only be uninvested for a few days, which would cost less than the transfer fee.

For this to work most effectively, you have to withdraw from your TFSA on December 31st and deposit it on the 2nd. The 1st is a holiday, so even if you did deposit in a new TFSA online, it won’t be invested until the 2nd anyway, as the markets are closed.

If your new TFSA allows for the same investments as your old one, you would only miss the markets for the end of the 31st. If they don’t allow for the same investments, you’re only behind by 1 day.

 


Chris Chris 01/26/2019
Canadian personal finance buff and all-around writing enthusiast, Chris loves breaking down complicated money ideas to show that they're really not so complex. 
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