Full Disclosure Finance

By Justin

So by now everyone is asking how they can open a TFSA and every financial institution is loving the attention. However, there are some important things to note before opening up your account.  

• Some banks charge fees for account transactions while others do not 
• It is more than just a “Savings” account
• Know the rules regarding deposit and withdrawal
• Know the tax benefits to assist in the RSP / TFSA debate

In my previous post I discussed the greatness of the TFSA but lacked the operational details because it was only March 2008.Now that the banks are unveiling the full set of info, its time to dive in.

1. Fees

The major banks are offering these accounts with varying fee structures. The fees consist of an annual administration charge because of the record keeping and such required for reporting purposes. Withdrawal fees are triggered when you withdraw money from the account.

For GIC’s, Savings Accounts, and Mutual Fund activity only major banks will not charge you for administration or withdrawal. In fact TD Canada Trust branches are the only ones that have a free withdrawal limit (1 per month, $5 per withdrawal after that). TD Mutual Funds do not have a withdrawal limit however.

For Stocks and activity requiring use of a brokerage (full service or discount) at the major banks the fee structure changes for the worse.

No Fees at all:RBC Direct Investing, Scotia McLeod Direct Investing, and HSBC Invest Direct.

Some Fees:BMO InvestorLine is a discount brokerage and charges a withdrawal fee of $25 per transaction and an admin fee of $50.  The admin fee is waived for the first year of an account and/or if you have over $100,000 in assets with BMO.BMO Nesbitt Burns is a full service entity and has an annual admin fee of $50 and a $15 withdrawal fee. TD Waterhouse has a $50 annual admin fee, waived if you have over $100,000 in total assets. You can also eliminate fees at TD if you use the electronic statement option for your billing.

Verdict: Watch out for the fee structures especially if you don’t bank at a major institution.  These admin fees are equal to 1% of the annual contribution limit, which is kicking you while you’re down if you’re also invested in mutual funds (and paying MERs). Ask about the fees and if you’re not happy go somewhere else.  It is easy to open up the accounts and transfer money, so this is no time for loyalty in the face of high fees!

2. Investment Options 

The name Tax Free Savings Account is being taken too literally.  Looking at CIBC offering the wonders of a “Tax Advantage Savings Account” with “a guaranteed high interest rate tax free” sounds like a dream doesn’t it! The truth is that banks are pushing high interest savings accounts and GIC’s really hard for the TFSA accounts (can’t blame them because they’re attractive in today’s market).  Some offer different accounts altogether depending on what you want. However, you can invest in the same things as your RSP. Tim Cestnick, who writes for the Globe, offers a great outline of the more specific ones outside of funds, bonds, and stocks. For instance, you can hold options, shorts, and private company shares (this one is detailed further by Tim).  The highest taxed forms of investment income are a sure bet to go into your TFSA. These include interest generating investments, foreign dividends, and options and shorts whose gains may be treated as regular income. 

3. Deposit and Withdrawal  

It looks like you can deposit up to $5000 per year, yeah, “we knew that already”. But many banks are offering a monthly contribution plan, so it appears that you can contribute at any frequency until you reach the $5000.

Withdrawal is the same.  You can withdraw money at any time. Money taken out of your TFSA frees up that amount of “room” so it can be put back in later. 

Example: You deposit $5000 on Jan 15, 2009.  You withdraw $1000 in Dec, 2009.  You now have $1000 of cap room you can use in 2010 on top of the $5000 annual limit.  So you would now be able to put $6000 in during 2010.

4. Tax benefits

 This is a critical factor.  The decision of RSP / TFSA, if you have to decide, comes down to what you predict your income tax rate will be upon retirement.  Because your RSP money is taxed at retirement age, it is most advantageous to contribute now if you think your annual income will be lower than your current level.

If you expect your annual income to be higher than current levels, the TFSA offers an advantage. You would be giving up the tax benefit of the RSP now and putting the money into your TFSA.  Upon retirement, you could withdraw from the TFSA tax free and at a higher marginal tax rate this represents substantial savings.  In this situation, if you had your money in an RSP, the annual withdrawal would be taxed at the full marginal rate.

In the event that you can maximize both TFSA and RSP contributions, by all means.

If you’re unsure about your future tax situation, it might be best to straddle the line and put a similar amount in your TFSA and RSP. Tim Cestnick provides a similar, yet more detailed, analysis.

Overall, the TFSA presents a new investment opportunity with substantial benefits.  Just make sure you ask a few questions before you open one.