Tuesday, April 7, 2009

Don't Churn your Tax Free Savings Account

I had my first bad experience with ING Direct yesterday. Okay, second, if you count them reducing my interest rates without telling me. I tried to make some deposits into my Tax Free Savings Account, which is well under the $5000 limit.

Now I've made some deposits and withdrawals from the account with the understanding that you get that contribution room back. This is the part they don't make clear.

From the ING TFSA FAQ

Can I "replace" my contribution if I withdraw from the account?
Yes. When you withdraw money from your Tax-Free Savings Account, you automatically create contribution room in the next year. This means you can replace what you withdraw in the future without penalty.

This is the clearest indication I was able to find on the ING website, and I was specifically looking for something that would tell me that I wouldn't be allowed to replace my withdrawals whenever I wanted.

You can put the money back, but not in this calendar year. It's like a nightclub that can only hold five thousand people, except that once some people leave, the bouncers still won't let any more people in, even though there's still room in the club.

Be aware. The money in your TFSA is there if you need it, but you don't actually get the contribution room back until the next year, so don't churn the account. (And no, this is not legal advice, just my experience.)

ING Direct.ca is still my savings bank of choice for their reasonable interest rates, functional user interface, and ability to download transactions directly into iBank.

The TFSA is a great place to save your after-tax money, but don't make the same mistake I did and churn the account. You reduce the room available for tax exempt savings.

This is probably a Canada Revenue Agency rule, but ING is at fault here for failing to manage expectations about what you can do with the TFSA. To be fair, I don't think any other banks are talking about this limitation either, because they all want your money. This can lead to disappointment, when you expect it to work one way and it ends up working another.

Still, INGDirect.ca is among the best choices for Canadian no-fee, online, high interest savings accounts. They have a referral program too, which means if you're a new customer and open an account with at least $100, they'll give us both $13 if you use my referral code (or Orange Key in their lingo): 31567867S1

Just don't churn your Tax Free Savings Account.
If there's a way around this, let me know in the comments.

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