Motley Fool: How to top up your TFSA even if you have no “new” money

How to top up your TFSA is the subject of my first blog of the new year for Motley Fool Canada, which has just been published.

Click on the highlighted text to retrieve the full piece: January is TFSA top-up time — How to contribute the maximum $5,500 even if you don’t have “new” money.

So what’s the “old” money you can use instead? Well, while younger investors probably have most of their money in RRSPs and TFSAs, old-timers who were saving for decades before the 2009 introduction of the Tax-free Savings Account tend to have significant chunks of their net worth in taxable non-registered (aka “Open”) investment accounts. This is particularly the case for those with generous corporate pension plans, which means RRSP room was limited by the so-called “Pension Adjustment” or PA that’s shown on your T-4 slips. (Yes, brace yourself for the annual onslaught!)

Of course, by definition, taxable accounts generate annual tax liability on all the dividends, interest and capital gains you may have enjoyed in the calendar year. In the next few weeks and months you can expect your mailbox to be full of T-3 and T-5 slips that tell you and also the Canada Revenue Agency just how much money you received and will have to pay tax on when you file your taxes late in April for the 2017 calendar year just completed.

Key concept: Transfers-in-Kind

The Motley Fool article goes into the mechanics of “transfers-in-kind,” which means identifying stocks or ETFs (or other securities) in your taxable account that can be transferred into your TFSA. Keep in mind that unlike such transfers to RRSPs, transfers-in-kind to TFSAs won’t generate any tax refund. However, it does mean that the portion of the security transferred into the TFSA will no longer generate those annoying T-3s and T-5s for the future.  And that future can be a long time because, as we pointed out in a recent MoneySense Retired Money column, the nice thing about TFSAs is that they can shelter investment income for as long as you live: even if you live past 100!

Yes, I am enthusiastic about the TFSA. I’ve always felt that non-registered accounts impose an unfair level of double taxation on investors. Consider the fact that if you invest $5,000 in a taxable account, you earned that money and paid income tax on it in the first place. If you’re in the top tax bracket, you might have had to earn $7,500, then pay $2,500 or more just to come up with the $5,000 for the investment. For it to then generate further tax liability every passing year strikes me as unfair, which is why one prominent retired actuary often told me he felt it was “futile” to invest in non-registered accounts.

TFSA undoes unfair double taxation of taxable accounts

So the TFSA is a good deal that merely restores some semblance of fairness to investors. I’ve written before that if our prime minister REALLY cared about the middle class, he wouldn’t have chopped back the $10,000 annual TFSA limit that prevailed in the last year of the Tory reign. That’s why the limit is once again $5,500.

Even so, if you put money into a TFSA every year since 2009, with the 2018 contribution you’ve now had ten years to take advantage of it. The cumulative limit is now $57,500 and I know plenty of readers who have grown that (tax-free of course!) to $100,000 or more.

So move heaven and earth to try to top up your TFSA. Read the full Motley Fool article to get the mechanics and tax consequences of transfers-in-kind straight. Your financial institution will no doubt be happy to assist you. Last I checked at my bank, it took more than an hour to get through, no doubt because many Canadians are doing just what I describe here.

Happy New Year!