Have you ever wondered how to transfer your TFSA to another financial institution? Just like transferring your RRSP, it’s a simple process, but due to contribution limits, there are a few other things to consider when moving your Tax-Free Savings Account.
To be clear, there are no tax consequences if you’re transferring your funds from one TFSA to another, but it needs to be done via a direct transfer initiated by the financial institution where your new TFSA is held. Since there is more than one way to transfer your TFSA, I’m going to outline what you want to do to ensure your TFSA transfer is done correctly.
How to transfer your TFSA
Before you transfer your TFSA, you need to set up a new TFSA account at another financial institution. Many people choose to go with a robo advisor such as JustWealth, Wealthsimple or RBC InvestEase since they offer low fee automated investing. Alternatively, those going the DIY investor route will open an account with a direct brokerage.
Once your account is set up, you need to have the company where your new TFSA is being held request that the funds from your old TFSA be transferred. To do this, they would require you to fill out a TFSA transfer form as well as the info about where your funds are being held. The easiest way to get this information is to provide them with your most recent statement as it would have the details that they need.
As soon as the transfer request is put through, there’s nothing your old financial institution can do. That said, many of them have a TFSA transfer fee, which you’re required to pay. Before you sign up for your new TFSA account, see if they’ll cover the transfer fee. It could also take up to 3-4 weeks for the transfer to complete.
Now that you’ve got your funds in your new TFSA, you can close your old account. If you prefer, you can keep the old account open, as you can have multiple TFSAs, but it’s probably best to close it.
What happens to my funds during the transfer?
What you’re currently invested in will determine what happens to your funds when you request a transfer. Let’s say you’re currently invested in ETFs widely available to the public, such as Vanguard ones. When doing the transfer, you could ask for a transfer in kind which would port everything you have right to your new financial institution.
For most people, things aren’t that simple. If you’re looking to transfer your TFSA to somewhere else, you’re likely not happy with what you’re invested in now or with your financial advisor. There’s a good chance that your portfolio consists of mutual funds exclusive to your old financial institution. If those funds aren’t available for purchase within your new TFSA, your old TFSA would be sold, and then the cash would be transferred to you.
This can be a problem for some people as they might be forced to sell at a loss when they don’t want to. There may also be deferred sales charges that would cost you a few percentage points of your portfolio’s current value. You also need to consider any missed opportunities since it may take a few weeks for your money to arrive.
What if you withdraw your TFSA yourself?
It’s not considered a direct transfer when you withdraw your TFSA and then deposited it into another TFSA. This would be a regular contribution, so there may be tax consequences.
How much you pay in taxes depends on how much you’re contributing. Let’s say you want to transfer $30,000 from your current TFSA to a new account, and you have a total contribution room of $69,500. You could withdraw the $30,000 and then immediately deposit it into your new account, and there would be no tax consequences since you’re now at $60,000, which is below your contribution limit. You would also get that $30,000 contribution room back the following year.
If you had $40,000 in your TFSA, you would only be able to withdraw and contribute $29,500 without going over your limit. TFSA rules are quite strict, so you would be charged a 1% tax on the excess amount for each month that you’re over your limit.
The easiest way to check your TFSA contribution room is to log in to your CRA account since it displays your info. That said, the CRA website is famous for not being up to date, so the number you see may be inaccurate. You’re better off logging all of your contributions and withdrawals on your own, so you know precisely how much TFSA contribution room you have left.
The easiest way to transfer your TFSA
There is one way to transfer your TFSA that only takes a few days, and there are no tax consequences to worry about. However, it requires a bit of timing.
Since you get your contribution room back from any withdrawals done the previous year, you could sell/withdraw all of your funds in late December and then deposit that money into your new TFSA on January 1st. You’d also be able to contribute the additional room you get since it’s a new year.
For people who are currently using a high interest savings account for their TFSA, this won’t be an issue, but if you’re invested in equities, you could still miss out on any potential gains (or losses) for those few days between the transfer. If you’re in a rush, this option is better than waiting for a few weeks.
People transfer their TFSA for a variety of reasons. They may want to use a better platform; they want to start investing, or they want to lower their management expense ratio. Switching just because your portfolio has not performed as well as you hoped shouldn’t be the driving force behind your decision as past performance is not an indicator of future performance.