RRSP banking web sites must be white hot with action today, as we all have an extra day to add more funds to our RRSP and then claim it on our previous year taxes. Leap Year adds one more day for the festive RRSP Rebalancing Season, and gives financial pundits another day to argue RRSP or TFSA ? The answer (of course) is it depends.
Another Exciting Leap Year is Here
No doubt there will be countless articles today arguing that you should be trying to sneak a little more money into your RRSP, because you have an extra day to do it (and that is always the best reason).
You could also view this extra day, as a day to clean up a bunch of financial things you have been ignoring like:
- Putting Money in your RRSP !!! OK, enough of that.
- Make up a financial plan for the rest of the year (you have 10 months still to go, after all).
- Check that all your insurance policies are up to date.
- Make an extra payment on your debt, just because that would be cool!
I view a Leap Day with trepidation because I am not getting paid for this extra day, am I? I am working an extra day for free? Not really, as I get paid bi-weekly, but for those that are being paid bi-monthly, you are making a little less per day in February than you would normally.
Question of the day:
If you were given a free day to do whatever you want, what would you do? Today is that day.
So at the end of last year, I wrote about things to do at the end of the year, and I “poo poo’ed” someone who mentioned (in a comment) that you could skirt the TFSA transfer fees if you took the money out at the end of December, and then deposited it in your new TFSA at the start of January. I thought, “How expensive could that transfer fee be?”, and luckily my friends at TD sent me a helpful update on my accounts that helped clarify it.
TFSA Year to Year Swap to Change Providers
“… TD Investment Services Inc. is introducing a new Transfer Fee of $75.00 plus taxes per transfer, effective March 1, 2016. This fee applies to each transfer of a TD Mutual Funds TFSA to another financial institution. This fee does not apply to a transfer to another TFSA within TD Bank Group. This fee will be collected from the bank account associated with your TD Mutual Funds TFSA that is currently used for purchases, pre-authorized purchase plans and redemptions. If you do not wish to accept this fee you may close your TFSA or transfer it to another financial institution without cost or penalty.
You can do so by informing us no later than 30 days after the date the fee comes into effect. Please note that, by using your TFSA or keeping it open after March 31, 2016, it means that you have accepted this fee. If you are considering a TFSA transfer, or require additional information, please visit your TD Canada Trust branch or call us at 1-866-222-3456 to speak to a Mutual Funds Representative today….”
Seventy Five Dollars? $75? Holy cow, talk about, “don’t let the door hit you on the way out customer service. Notice that you can avoid this fee, if you choose to close or transfer your account from your TD Mutual Funds TFSA vehicle. As I have mentioned I have had many interesting issues with my TD Mutual Funds RESP account, so my opinion would be to open an account elsewhere in the next month or so, and transfer your account there.
Also, my sincerest apology to any commentator who mentioned the idea of the transfer TFSA at end of year gambit as well, I guess there are situations where this might make perfect sense.
I borrow this concept from Million Dollar Journey who had this as one of your end of year things you should be thinking about doing. Most of the hints are good ones, but this one had me scratching my head a little.
TFSA Piggy Bank
Now let’s be clear that you can transfer from a TFSA that you own to another TFSA (that you own), if you do a DIRECT transfer, as outlined by the CRA here. I am not sure if you get the transferred TO institution fill in the forms, or the transferred FROM institution fill in the forms, but this is really what you should be doing, if you are thinking of doing a transfer from one TFSA to another. There might be fees involved, depending on whom you are dealing with.
The other idea is to cash out money from TFSA account, and then wait until in the new year to move it into another TFSA account. I suppose an example of this might be if you had a Mutual Fund TFSA account, and you wanted to transfer money to a Trading TFSA (e.g. TD Mutual Funds account to a TD Waterhouse TFSA account), but I think you are better off doing this as an official transfer, and the following up with the CRA after it all happens to make sure that it has not done anything wonky to your TFSA limits.
The CRA has a very helpful article Example – Qualifying transfers between TFSAs of the same individual, have a read and see if your transfer can be done. There have been lots of stories of folks making mistakes with their TFSAs and having to pay hefty fines from the CRA for their misunderstanding of the rules.
Am I missing the point on this one?
TFSA vs RRSP
I figured I’d cover one of the most asked questions, “Should I put my money in my RRSP first or my TFSA?”. For most Canadians, it is an interesting question to ask, but I think I have found the definitive answer the question on the order in which extra money should be used. I think the following explains it clearly:
Pay off your debt first¹
¹ – If you do not have debt please take the advice later on in this post.
Seems pretty straight forward doesn’t it? Maybe I am not being clear enough here, maybe I need a list of 10 Ways to Save ? I doubt it, you get my point.
Now that we have cleared up that one, let’s move on to the real question, which savings vehicle do you try to max out, if you are out of debt?
My opinion is that you should be putting as much as you can (within the guidelines and limits of the CRA) in your TFSA. If you have reached the maximum levels for your TFSA, then you can start thinking about your RRSP (which shouldn’t be too hard, given the low yearly allowances on the TFSA).
- When you look at the balances of your TFSA you are (in most cases) looking at money that you can have, and use (after brokerage fees or whatever similar costs might be involved). Depending on your portfolio, a TFSA is available in a short period of time, and when you transfer funds out of it, you can use that money without having to worry about paying taxes or the like.
- With an RRSP, you can withdraw money, however, on top of the brokerage fees you might pay, you are also going to have to pay the CRA. If you have made no money in the current year, the tax will be low, however, if you are John (or Jane) Paycheque, earning a normal income, taking this money out is going to cost a fair amount in taxes. The RRSP is there for when you have lower income (later in life) and thus taking money out of it will have you incur lower taxes (lower than when you were working). Yes, if you put money into an RRSP, you will get a tax refund, but, that “refund” will get repaid to the CRA when you take the money out of the RRSP (hopefully less than your refund initially).
This is my opinion, I think there is no wrong choice here, maybe do both, but you must unburden yourself from debt first, then figure out how to save. Keep that in mind this RRSP season.
I like the title as Mrs. C8j is a former ballerina, so any time I can figure to use a ballet term I get extra points (one day I will figure out how to put Benesh Movement Notation in a post). What does Grand Jeté from RRSP to TFSA have to do with dancing? Nothing as you will see, but it is still a fun title.
What could I possibly mean by this odd title? For a long time folks have talked about how to deal with RRSP tax refunds (if you get them, some folks simply have that built into their taxation deductions, so they enjoy their refund all year round), and this is another interesting idea, that I am sure many folks are already using, but I will see if I can sum it up.
The Full RRSP to TFSA Grand Jete
Image courtesy of Danilo Rizzuti, at FreeDigitalPhotos.net
My first assumption is that you are out of debt or have not much left on your mortgage (and thus nearly out of debt), if you have debt to pay off, please refer to the RRSP to Debt Pas De Deux method, where you substitute the word Pay Debt for Put Money in TFSA in my method.
The Grand Jeté is simply done, but let me wander through the steps for you in case you are unsure.
- You have extra money that you wish to save for your retirement future (and good on you for thinking of this). Let us say the amount is $5000 (you got an Atta Person Bonus from work).
- You decide to put that money into your RRSP (or a Spousal RRSP if you want to add some exciting savings pirouettes before the Grand Jeté).
- When you deposit your $5000 into your RRSP, you will receive a refund of about $1300 or so ( your mileage may vary).
- You receive this cheque as a refund for the CRA into your savings account (because remember cheques are going away very soon).
- Time for the actual Grand Jeté you now take this money and transfer it to your TFSA for it to then grow without tax repercussions (assuming you have room in your TFSA, you cannot do the Grand Jeté in this case you may only be able to do a Petit Jeté).
That is it folks, that simple. So you must have RRSP room to make the contribution and room in your TFSA to make the deposit, but that is about it. At the end of it, you have two viable savings plans with money in them. You might be able to automate this if you:
- Make per pay cheque RRSP deposits, then you can estimate how much tax you are “saving”
- Set up a per pay cheque deposit to your TFSA to put the savings there.
I think I’d call that a Modified Petit Jeté.