If you have money in a high-interest TFSA but now you want to invest it in index funds, this post will show you how to convert your account. We start with a high-interest TFSA and change it to a TD e-series TFSA.
In 2009 the acronym TFSA was introduced into the Canadian vocabulary. A Tax-Free Savings Account (TFSA) is a financial tool that was added as an option for Canadians. It is a basket in which you can put your money and have it grow tax-free (wahoo!). A couple years after its inception I had a small lump sum of money that I wanted to put in some type of account and a TFSA seemed like a good idea.
What exactly is a TFSA:
- They are available to anyone 18 and over
- Contributions and any interest, dividends, capital gains generated in the account are tax-free (except for foreign interest on foreign investments)
- Any money you withdraw from this account is also not taxed
- You can contribute currently up to $5,500 per year (this number changes depending on the year)
- You can carry forward unused contribution room indefinitely
- Money can be taken out of this account without penalty, unlike an RSP
That all sounded positive. I wanted one.
Not knowing anything at all about TFSAs I listened to my bank advisor at the time and deposited some money into a TD High Interest TFSA. It sounds good, right? I liked the words “high interest.” What I didn’t know at the time was that a TFSA can be used much more robustly to grow your money, rather than parking it in a simple savings account. My money sat there idling for years until I began my financial overhaul a few months ago. I recently took another look at just what high interest meant and it’s kind of abysmal.
The interest rate is 0.70%. What??
Compared to typical savings account interest rates of 0.05% I suppose that could be considered high interest. But that’s only if we are comparing with other savings tools with low rates and are being generous with the term.
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A TFSA should be called a TFIA
A huge problem with the TFSA is its name, in particular, the “S” part of TFSA. I believe it should have been called a Tax-Free Investing Account instead. This reflects what this tool actually is; much better than the confusing name Tax-Free Savings Account. From talking to many people about TFSAs and a lot of reading, I am by no means the only person who found the term confusing.
A study by the Royal Bank of Canada found that 65% of money held in TFSAs were either in high interest savings accounts or guaranteed investment certificates (GICs).
What you can actually hold in a TFSA
Something many people do not know and I was never told by any bank advisor I met with regarding initially setting up a TFSA, is that there are many different things you can have within a TFSA. These include:
- Mutual funds
- Index funds
- And yes, those high interest savings accounts
The TFSA is just the backpack. You can put lots of different things in a backpack.
I wish I knew more back then and had taken advantage of a way to shelter investments tax-free. But I would rather look forward than grumble (too much) about the past. When you know better, you do better and all that.
My risk tolerance for investing that small lump sum of money is definitely higher than a savings account. Similar to how I converted our daughter’s RESP mutual funds into TD e-Series funds, I wanted to get out of the savings account completely and into e-Series funds.
Did you know you can have e-Series index funds in a TFSA? Probably many of you did. But I bet many of you didn’t as well. I was in the “didn’t” category until a few months ago.
If you already have a TD TFSA high-interest savings account, I will outline the steps for how you can convert it. It is a little different from when we converted our daughter’s mutual fund to an e-Series mutual fund account. The high-interest savings account is not a mutual fund account so there is an extra step there.
8 easy steps to converting a high-interest TFSA into a TD e-Series index fund account
1. Make an appointment with your bank advisor at TD.
2. Print off this form and bring it with you to your appointment.
They should have these forms at the bank but I have read and heard stories of some people meeting with advisors who were not well versed in the e-Series funds and converting to them so it’s better to come prepared.
3. Remember your ID.
Bring your Social Insurance Number (SIN) and another piece of government ID, such as a driver’s license, along with you to the meeting.
4. Complete an investor profile.
If you haven’t recently (within the past year) completed an investor profile questionnaire at TD, you should do so at your appointment. I had already gone through a questionnaire only three months prior to this appointment so we thought that was all current. But I had completed it for another account, our daughter’s mutual fund RESP account. Make sure you have an up-to-date investor questionnaire done for this specific TFSA.
I didn’t do this at the appointment and ran into some hiccups when I went to set up purchases of e-Series index funds online. My purchases were not in-line with my previous responses to the questionnaire (when I originally set up the high-interest tax free savings account) so a day after I entered them online, I received an email saying they were rejected as they were not suited to my current investor profile.
It all ended up fine, I just had to call the help line and go through the questionnaire over the phone so that I would be approved to make the index fund purchases I wanted. You can save yourself this hassle and do the questionnaire at your appointment.
5. An extra step is needed to convert to a TD e-series account.
Here is where an extra step happens. Since the tax-free high interest savings account is not a mutual fund account, it can’t be directly converted to an e-Series account. First we had to open a temporary TD mutual fund account. Then we used the money that was in the high interest savings account to purchase a money market fund in that mutual fund account. That newly opened mutual fund account could then be converted to an e-Series account.
6. Fill out the application and sign.
After that you can fill out the application form you brought with you to convert the newly created mutual fund account and sign a bunch of papers. Your advisor will send in the form for you.
You will wait for your application to be processed and within a week or two you will get a confirmation email saying that your account will be converted within 1 business day.
8. Purchase index funds.
The next day you can start purchasing TD e-Series index funds online.
Passive TD e-series index fund investing TFSA
Once my account was converted into an e-Series account, I took the money that had been sitting in the original TFSA (and temporarily parked in the money market fund) and divided it into four. I followed the Canadian Couch Potato’s model portfolio for an assertive investor. Equal amounts were purchased of the following four index funds:
- TD Canadian Index fund – e (TDB900)
- TD U.S. Index fund – e (TDB902)
- TD International Index fund – e (TDB911)
- TD Canadian Bond Index fund – e (TDB909)
The first three index funds are the same as the portfolio we recently created for our daughter’s RESP. I added the bond index fund here to the TFSA for a bit more of that well-rounded conservatism. We didn’t add this bond fund yet to our daughter’s RESP as she is under two years old and we’re comfortable with being a little more aggressive over the many years before she would be allowed to withdraw any money for school. We will add this bond index fund to her RESP as well in a few years.
Figure out what works for you
Your comfort level may be with the high interest tax-free savings account and that’s fine. We all have different risk levels at different times and we are not all the same investor. You have to do what’s right for you and your family. But it’s super important to know that you can have many different types of investments within a TFSA. You don’t need to simply default to the first thing you’re offered at the bank (like I originally did). Research what’s best for you. If you want to make a change, it’s not too hard to do so and usually well worth the trouble. It’s time we start thinking of TFSAs as Tax-Free Investing Accounts and maximize what this tool can do for our money.