We are now into year 2 of the Tax-Free Savings Account and the majority of your members who began investing in this new product last year have already moved this year’s $5,000 deposit limit from their regular savings to their TFSA account. Most were probably like me, calling the credit union during the first week of January to move that $10,000 ($5,000 each for me and my husband) so that the interest would begin accumulating under the TFSA and not appear on my year-end T5 from our regular savings. This type of TFSA investor is the easy one. They add the maximum limit each year and leave it there, no withdrawals.
Where the credit unions and other financial institutions are going to have problems is with those members who have keyed on the word “Savings” and treat the TFSA as a normal savings, putting money in, taking money out, putting money in again. It is unfortunate that the Government did not use the word “Registered” as was used with the RRSP, RRIF, RDSP and RESP. Maybe if it was called a RTFA (Registered Tax-Free Account) we would have people taking more care.
Credit union staff need to be aware that just looking at the current TFSA balance of a particular member will not provide the needed information on the deposit room available. The TFSA room during the year is decreased by each deposit but NOT increased by any withdrawals. Funds withdrawn from the TFSA only increases the room for next year, not this year.
So for those members who are using the TFSA as an in/out account, an example on how this affects their TFSA room:
Susie’s TFSA Room as at Jan 1, 2009 - $5,000
Plan history: Semi-monthly deposits of $150 begin Jan 15th ($150 x 24 = $3,600)
April 12 - $1,000 deposited
June 29 - $2,000 withdrawn – account balance after withdrawal $650
Sept 11 - $500 deposited
Oct 22 - $1,000 withdrawn – account balance after withdrawal $1,350
Nov 5 - $800 deposited
Account balance as at Dec 31’09 = $3,900
Although the final account balance is under $5,000, Susie has actually over-contributed $900 and was in a penalty situation as of Nov 5th. Susie will incur a 1% penalty during Nov and Dec in the amount of $15.
In this example by the end of October Susie had already deposited $3,000 semi-monthly plus an additional $1,500, totalling $4,500. In November another $1,100 was deposited ($300 from the semi-monthly and $800 additional) causing a $600 over-contribution. Then in Dec the semi-monthly deposits added another $300, giving the $900 over-contribution. The two withdrawals made in June and October do not off-set the over-contribution.
Susie’s 2010 TFSA room will kick in Jan 1 - $5,000 plus amount withdrawn in 2009 ($3,000) less over-contribution amount ($900) = $7,100. This is not something the credit union staff can calculate for a member. If you were to just look at Susie’s account, the assumption would be her 2010 room was $6,100 ($5,000 minus $3,900 account balance plus new 2010 $5,000).
For these members who used the TFSA as just another savings account, the actual deposit room available in 2010 may be unknown until after all 2009 CRA year-end reporting has been done by the credit union. So maybe come April or May they will be able to go on-line to their CRA “My Account” and see their TFSA available room or wait for their 2009 CRA TFSA Notice of Assessment.
In the meantime, credit unions should take steps to ensure members understand how a withdrawal from their TFSA does not give additional TFSA room for the current year. I would suggest that the member receives a copy of the withdrawal form which includes a caution clause indicating the amount withdrawn does not increase the current year’s TFSA contribution room. If a deposit form is used for subsequent deposits, I would suggest having wording on the form that it is the holder’s sole responsibility to determine that the amount deposited is within his/her TFSA contribution room.
I am a big believer in CYA!