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Tax-free sneaky accounts? What to watch for with TFSAs

Though it’s true that a TFSA has many benefits, there are a few things to watch out for – things that you may not have even thought of.
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Brandon Miller, January 11, 2014 4:49:47 PM

We’ve been hearing a lot about tax-free savings accounts lately with the new bumped-up $5,500 limit, but it’s important to know the full picture. Though it’s true that a TFSA has many benefits, there are a few things to watch out for – things that you may not have previously considered. I know that I opened (and deposited money into) my TFSA years ago without doing any research of my own. I had heard it was a good thing to do, so I did it. But here are three things to mull over as you bask in the glow of your TFSA.

Fine-print interest rates

The Globe and Mail published an article wherein someone from ING discusses getting a mass of calls inquiring about the bank’s three per cent TFSA interest rate offer. People wanted to know if there would be a bait-and-switch, and when the deal would end. Well, yes, the deal is going to end. ING didn’t give a direct answer of when the interest rate would fall, or even say by how much, but it did confirm that it would happen. That’s how it works when a bank offers a ridiculously high rate to entice new customers.

A lot of the time, details about interest rates are in the fine print. The Canadian Imperial Bank of Commerce, for example, is offering a 2 per cent bonus interest rate for new balances that ends March 31st. Information on the bonus rate is – say it with me (or out loud to your computer) – in the fine print.

Transfer and withdrawal fees

Transfer fees are the bane of my existence. Okay, that might be a bit of a stretch. But I despise them. I spend a lot of my time in the United States and, as such, I do most of my banking online. With one of my primary accounts, I get one free transaction a month. I continuously have to count the days until I can move money around because I refuse to pay a fee to transfer my own money from one account to another. It’s a hassle, and probably my biggest gripe with my saving account and my bank. Thankfully, my bank charges no fee for TFSA withdrawals.

I’m not someone who likes to pay fees for the things I do with my money, and so I was a bit surprised to find that many banks charge a person to transfer their TFSA. ING research shows that many Canadians are billed when they move their tax-free account from one institution to another. Up until last week, I had no idea that I could be forced to pay a fee if I decided to make a switch of this type. CIBC, for example, charges $100 to transfer your TFSA to another bank. I find this ludicrous.

Tracking contributions and withdrawals

The first year the TFSA was in existence, 70,000 people withdrew money and then redeposited it into their accounts. Canada Revenue Agency instituted levies, and then rescinded due to public outrage. But people do now get charged when they contribute too much, whether it is on purpose or by accident. And the problem is that a lot of Canadians don’t know that it is their responsibility to keep track of contributions and withdrawals.

According to a 2011 Angus Reid public opinion poll, 23 per cent of Canadians said that their bank was responsible for tracking TFSA contributions. Another 12 per cent thought the government was doing it, and seven per cent said their advisor is responsible. It’s important to keep an ongoing record of your transactions so that you don’t over contribute and get charged a tax penalty. That’s all on you.

And if you’re consistently making withdrawals and treating your TFSA like a savings account, it’s probably not the right place to be keeping your money, anyway. If you’re on the other end of the spectrum and you have multiple TFSAs, keep in mind that the annual limit applies to all of your accounts combined. Thus, it is even more important to track your contributions and withdrawals.

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Brandon Miller

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