Category: Investing

Before you hire a financial advisor, it is important to do some research and make sure the advisor is who they say they are.  Did they really complete their CFP?  Are they licensed in your province?  Have there been disciplinary action against them in the past?  Just because a potential financial advisor wears a nice suit, doesn’t mean they are legit.

To complete a background check on an advisor, you only need their name. The company name they are licensed to deal with is also useful.

Here is a list of Canadian fee-only financial planners.

Check advisor registration

The Canadian Securities Administrators keeps a list of advisors who are licensed to sell investment securities.  This list includes everyone except individuals registered with the OSC (Ontario Securities Commission).  To check out advisors working in Ontario, go to the OSC site.

For both sites – Enter the advisor name – If the advisor is found, click on their name to retrieve their entire profile. This will tell you which securities they are eligible to sell. For example “Dealing Representative (Mutual Fund Dealer )” means they are eligible to sell mutual funds.  “Securities (Product)” means they can sell to stocks and ETFs.

These sites also indicate the firm the advisor is licensed under.

Background check and disciplinary actions for stock brokers

If your advisor is licensed to sell stocks, ETFs options etc then you can check the IIROC website to run a background check. This can be used to verify their employment, licensing, courses and disciplinary actions

The IIROC site contains a search button where you can search by name for an advisor. I tried entering the last name of a friend of mine (yes, I have friends) who is an advisor and sure enough, his name and employer appeared. I had to click again to generate a report which listed the following information:

• Full name
• Current employer and address
• Previous IIROC employers and dates.
• Approval categories – this tells you what the advisor is licensed to sell.
• Provinces in which advisor is registered to trade
• Industry courses
• Regulatory disclosures
• IIROC disciplinary actions

The Canadian Securities Administrators has a disciplined persons list which is easy to use. This list contains everyone in B.C., Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia and New Brunswick who has been disciplined by the CSA.

Mutual fund saleperson background check

If your advisor is licensed to sell mutual funds then check the Mutual Fund Dealers Association (MFDA) site.  Don’t forget that a lot of advisors are licensed to sell both mutual funds and stocks ,so you should check for both.

• Completed disciplinary cases
• Current disciplinary cases
• Schedule disciplinary cases

Current cases against individuals and companies

The last place to check for disciplinary actions is in the ongoing cases area. These have to be researched on the provincial websites.

• British Columbia
• Alberta
• Saskatchewan
• Manitoba
• Ontario
• Quebec
• Nova Scotia
• New Brunswick

Warning lists

Some of the provinces keep lists of individuals and companies that “appear to be engaging in activities that may pose a risk to investors”

• OSC (Ontario)
• BCSC (British Columbia)
• NBSC (New Brunswick)

Verify CFP (Certified Financial Planner) designation

The CFP is the best designation for your financial planner to have.  To verify if your advisor has a CFP in good standing – visit this site and enter the name of the advisor.

Tip – This tool can also be used to find a CFP professional in your area.

Better Business Bureau

It might be worthwhile to check the Better Business Bureau.  Do a search on the company name, as well as the advisor.

Phone their head office

If you met an advisor outside their office, you should check their employment. If they say they work for Edward Jones, call the head office and verify.

Google search

Try searching for your advisor name and see what comes up. If the name is too common, add relevant words like “financial advisor” to the search.

Check your advisor references

As one of the last steps, you can ask your advisor for a couple of references. If you can get in touch with a reference, ask them what kind of service they are getting from the advisor. I would take these references with a large grain of salt – you don’t know what the relationship is between the reference and the advisor. You also don’t know how sophisticated the investor is – it’s possible they are getting very poor service and just don’t know any better.

If nothing else, a lack of references would be a strong warning sign that something is wrong.

United States search

Although your advisor is working in Canada, it doesn’t hurt to check if they had any previous problems in the US.  Check out these two sites for American financial advisors:

• FINRA broker check
• SEC

More information

• How to do a background check on your advisor – Where does all my money go?
• How financial advisors get paid
• Canadian financial advisor qualifications and courses
• Should financial advisors disclose their commissions?
• Some financial advisors are just salespeople
• Canadian online discount brokerage comparison

This question of TFSA or RRSP for your retirement funds is a tough one, because there are a lot of variables to consider.  To make things worse, some of these variables are unknown, which means you have to make assumptions about future events which might not be all that accurate.

I’ve put together some very general guidelines which might help guide the decision of where to put your retirement money.  My suggestions are very generic – it is important to understand the reasoning behind the suggestions and to be able to apply it to your situation or consult an investment or tax professional.  The further you are from retirement – the greater the uncertainties.

Quick review – Contributions to an RRSP are “pre-tax” and result in taxable income on withdrawal.  Contributions to a TFSA are “after-tax” and do not have any taxable implications on withdrawal.

RRSP contributions work great if you are withdrawing at a similar or lower marginal tax rate compared to the contribution.  If you are withdrawing at a higher tax rate or if you will be receiving GIS payments, the RRSP is probably not a good choice.

Here are some suggestions to help decide whether to contribute to an RRSP or a TFSA.  The income numbers refer to your current working income.

These income ranges were taken from the Ontario marginal tax rate page at TaxTips.ca.

High working income – $75,000 or more

In this case, the RRSP is likely to be the winner or equal to the TFSA.  If you are contributing at a high marginal tax rate, it’s likely that you will be withdrawing at a similar tax rate or lower in retirement.  The OAS clawback could influence this equation, but that doesn’t affect many people.

Michael James expands on this idea in Downside protection of the RRSP.

Low working income – Less than $38,000

In this scenario, the TFSA is likely to beat an RRSP or at least tie.  The reasons for this are:

1. You are contributing to the RRSP at a low marginal tax rate.  There is a good chance that your marginal tax rate will be similar or higher in retirement.
2. GIS clawback.  If your income is low enough to qualify for GIS – the TFSA will be a clear winner since withdrawals do not count as income.  If you are likely to qualify for GIS payments, contributions to RRSPs should be avoided altogether.

Medium working income – $38,000 to $75,000

This range is a grey area, since neither RRSP or TFSA is a clear winner.  In this case, splitting your contributions money between the TFSA and RRSP is a good strategy.  Or if in doubt, focus on the TFSA, since you can always use that money to contribute to an RRSP later on.  Take a look at your marginal tax rates and try to decide yourself what to do.

Some more TFSA vs RRSP factors to think about if you really want to get complicated

Tax rates can change

• The various tax brackets and marginal tax rates could change before you get to retirement.

OAS clawback

• Currently OAS payments get phased out if your net income is above $67,688 (for the 2011 tax year).  The clawback is 15% of the net income over that number.  Once your net income reaches $109,607, the OAS payment will be zero.
• Withdrawals from your RRSP or RRIF will be added to your net income.  TFSA withdrawals will not.
• The OAS clawback acts like an extra tax on your marginal rate.  If a retiree makes an extra thousand dollars, they will lose 15% due to the OAS clawback.
• Age credits – Once you hit 65, some credits become available which can lower your net income.
• Income splitting – It is very easy for married or common-law seniors to split their retirement income with a spouse for tax purposes.  This will likely lower their net income.
• If you are not sure about whether the OAS clawback will affect you – consider that only about 5% of seniors currently have their OAS payments clawed back or eliminated.
• If you can split income with a spouse, you would need to have a minimum gross income of roughly $140,000 in today’s dollars before you would even start to have any OAS clawed back.

RRSP contributions can span different tax brackets

• I’ve estimated that if you make more than $75,000, the RRSP is likely a good choice.  But what if you make $76,000 and contribute $5,000?  In that case, only $1,000 of your contribution is at the higher level.  The other $4,000 is in the “grey” area.

You can control RRSP/RRIF withdrawals and retirement date

• If you are 50 years old, have a two million dollar RRSP and are starting to worry about having “too much” money – consider retiring earlier.  Or start contributing to a non-registered account, once your TFSA is maxed out.

TFSA contribution room limited

• If you make more than $28,000 per year – you will have more RRSP contribution room each year than TFSA room.  Plus, most people have lots of unused RRSP room.  If you make a decent income and can save a lot of money – you will quickly use up your TFSA room.

You have other options

• If you are at a point where you have maxed out the TFSA and don’t want to contribute anymore to an RRSP – you can put the money into a non-registered account.

Canadian dividend gross-up

• Dividends from Canadian companies get a preferential tax treatment.  However, they also result in increasing your net income by the amount of the gross-up, which can decrease OAS payments.

Tax-free savings account have no withdrawal restrictions

• One of the dangers of the TFSA is that you can do a withdrawal anytime for any amount without any kind of penalty.  RRSP withdrawals are subject to withholding taxes and are considered taxable income.  For some people, money in a TFSA might be too easy to access.

The future is uncertain

The younger you are, the harder it is to determine which account to put your retirement money.  When in doubt – contribute to the TFSA first – you can always withdraw from your TFSA and contribute to your RRSP later on.

Good articles on TFSA vs RRSP

The Advantages of RRSPs over TFSAs from Canadian Capitalist.

New debate between RRSP and TFSA from Retire Happy (Jim Yih)

More information

TFSA rules

Rules for converting your RRSP to a RRIF

One of the important aspects of the tax-free savings account (TFSA) is estate planning.  Much has been written about TFSA contribution and withdrawal rules, but with the TFSA, you have the ability to decide who gets the money in the account if you die.

If you have a TFSA, take a few minutes to figure out the estate planning rules (they are not difficult) and make sure your tax-free savings accounts are set up properly.  If you do this, the TFSA can be passed to a spouse or common-law partner with little or no tax implications.  My wife and I set up our TFSAs a couple of years ago and to be honest, I have no idea if we have this set up or not.  It’s on the “to do” list!

The successor holder and beneficiary are provincially legislated.  The provinces and territories came up with their legislation at different times after the tax-free savings account was started.  If you were an early TFSAer, it’s very possible that your financial institution didn’t have the successor holder or beneficiary information on the account setup form.

Tip – To pass the TFSA to a spouse or common-law partner, designate them the Successor Holder.  Anyone else – designate them a beneficiary.

If you wish to give your TFSA (tax-free savings account) money to a designated person upon your death, this can be done using one of two options available through the TFSA. Note that these options are not available to Quebec residents.

1) TFSA Successor holder

You can only designate a spouse or common-law partner as the successor holder.  If you die, ownership of the tax-free savings account will be transferred to the survivor. The survivor gets to keep the tax-free status of the TFSA money without affecting their existing contribution room.

Advantages to naming a successor holder:

1. No probate fees
2. No tax issues since money is never de-registered.
3. Money will remain in a TFSA.

2) TFSA Beneficiary

A beneficiary can be any person. If you die, the money will be transferred to the beneficiary. If the beneficiary is not a spouse or common-law partner, the money will be de-registered as of the date of death of the original owner and will not remain tax-sheltered. The money will be transferred to a non-registered account in the name of the beneficiary. Any future capital gains will be calculated using the value of the investments as of the date of death of the original owner.

If the beneficiary is a spouse or common-law partner, they are allowed to make an exempt contribution to their own TFSA. The contribution cannot exceed the market value of the TFSA on the date of the original owner’s death. If this applies, the survivor gets to keep the tax-free status of the TFSA money without affecting their existing contribution room. You have to notify the CRA if you are making an exempt contribution as a survivor within 30 days of the transfer.  This can be done using Form RC240, Designation of an Exempt Contribution Tax-Free Savings Account (TFSA).

Advantages to naming a beneficiary:

• No probate fees.
• Minimal tax issues if beneficiary is a survivor.
• Money will remain in a TFSA is the beneficiary is a survivor.

Tip – Name a beneficiary, even if you have already named a successor holder.  If you and the successor holder die at the same time, the beneficiary will get the money.

If you live in a Quebec, these options don’t exist. The TFSA can only be passed through the estate.

Note that if you name both a successor holder and beneficiary on a TFSA, the successor holder will override the beneficiary.

These designations are account specific. You can name different successor holders or beneficiaries to each account. It is up to you to ensure that the correct estate information is assigned to each account.

You can designate a beneficiary or successor holder when you set up your TFSA or any time later on. The designations can be changed at any time.  Just contact your financial institution or advisor to verify or change your TFSA designations.

Definition: Survivor – a survivor is an individual who is, immediately before the TFSA holder’s death, a spouse or common-law partner of the holder.

What happens to the TFSA if I don’t name a successor holder or beneficiary?

If you don’t specify a successor or beneficiary on the tax-free savings account, the money will become part of your estate. Your estate will be handled according to your will or applicable laws.  The money in the TFSA can still be willed to a spouse or common-law partner, but probate fees will be applied and the money will no longer be tax-sheltered.

TD Waterhouse is owned by the TD bank (Toronto Dominion Canada Trust).

Overall impressions

Of all the bank-owned brokerages, this is the one where I’ve heard the most favourable comments from users. Like all the other bank-owned brokerages, this one also charges very high fees.  You only get a break on trading commissions if you are an active trader or have $50,000 in household assets.

Online trading commissions

• $29.00 – If household assets are less than $50,000 and less than 30 trades per quarter.
• $9.99 – If household assets are greater than $50,000 or 30-149 trades per quarter.  Online statements.
• $7.00 – If 150 trades or more per quarter.

If you would like to compare all the different Canadian discount brokerages, check out the Canadian discount brokerage comparison.

Phone trading commissions

• $43 Cdn minimum or $35 Cdn + cost per share for stocks trading on Canadian index.
• $43 US minimum or $39 US + cost per share for stocks trading on US indexes.

Annual account fees

• Registered stock trading account – $100 if balance is less than $25,000
• Registered GIC and mutual fund acct – $25 if balance is less than $25,000.
• RESP – $50 if balance is less than $25,000
• TFSA – $50 – waived if balance > $25,000 or sign up for eServices

Foreign exchange fees

• Spot rate + 1.50%.

If you are exchanging a larger amount ($10,000 or more) or have a lot of assets, then phone and try to negotiate a better exchange fee.

Mutual funds

• Full range of mutual funds available.

Allow US$ in RRSP accounts

• No, but they allow “wash trades” where you place the trade, call same day, tell them to “do a wash” they will buy a US$ money market fund so there is no conversion.

Free real-time quotes

• Yes

Minimum to open account

• None

Dividend Reinvestment Plans

• Yes

Phone number and automated voice shortcuts

• 1-800-465-5463
• To get through the automated phone tree, just press 2,2.

Some opinions on TD Waterhouse discount brokerage

I asked a few TDW clients their opinion of TD Waterhouse discount brokerage:

My Own Advisor had this to say:

I have been with TDW for over 5 years. I chose TD Waterhouse (TDW) since at the time, I already had many investment accounts with them and I felt it was a logical choice to keep most of my investments under one roof – keep things simple.  That however, was not my only reason.  Other primary reasons for selecting TDW were as follows:

• Fee and commission structure is competitive.
• User interface (EasyWeb for web-banking) is easy to understand and use; from what I understood about their discount brokerage site (WebBroker), it would be no different.
• Customer service is excellent.  Whenever I had a question about my accounts, the setup process, I recall within a few prompts, I was talking to a live representative that answered my questions effectively and efficiently.

What I like about TDW:

• Fee and commission structure remains fairly competitive – I consider them “in the middle”.  Although not trend-setters in this category, they are part of the sub-$10 online stock trading commission community.  Even though I don’t trade often, low-fees are important when I do trade.
• User interface (WebBroker) remains excellent.  Their online views associated with investing and account balances are straightforward.
• Website overall is easy to navigate and very user-friendly.  I find there is no guesswork involved to make your online transactions.  Their stock order-entry process is simple and efficient; within a few clicks, I’m done.
• TDW representatives are professional and customer-focused, they remain so.  Within a few telephone prompts, I’m always talking to a “warm body”, I don’t have to wait long to speak to a representative.
• I can DRIP all the securities I own (stocks, ETFs, REITs) in my registered and unregistered accounts.  As a dividend investor, the reinvestment process is very important to me.
• The real-time quote feature (for stocks, ETFs) is nice.
• The ability to create a portfolio of holdings to monitor/watch is nice.
• Via their Global Trading menu, the ability to have online access to multiple European and Asian stock exchanges is nice.
• eServices menu is excellent, the ability print pdf files of account statements, transactions and tax documents.
• Happy that the account administration fee for a TDW TFSA is waived if your balance is > $25,000 or you sign up for eServices.

What I dislike about TDW:

• Why can’t you have U.S.- dollar RRSPs?  What’s the big deal?   (For example, why not hold my Coca-Cola stock in my RRSP in U.S. funds?)
• It would be nice to see TDW lower their “cheap trade” (sub-$10 commission fee) threshold to $25,000 or $50,000 per household.  This would help many DIY investors.   (I recall I was paying $29 per trade in the beginning, that’s steep – it’s a big deterrent to many DIY investors trying to build a passive, ETF portfolio in their RRSPs).
• TDW charges $100 annually if your registered account such as an RRSP or LIRA balance isn’t > $25,000.  That’s very annoying, especially if you have more than that amount if you added up the balances of all other TDW accounts, such a nonregistered portfolio and a TFSA.  TDW should strongly consider waiving all account fees if the balances of all accounts owned exceeded $100,000 or better still $50,000; provide an incentive for investors to build then maintain portfolios.
• I’d like to see better tools – introduce some features or functions to show yield on cost, long-term performance results of your holdings.
• Include more investment calculators, such as dividend reinvestment calculators.
• Upload some demos or online videos to show how features can be maximized – “taking a tour” is not very learner-centric.
• Get creative going-forward – why not develop better relationships and partnerships with some notable Canadian bloggers as resources?  (Let’s breakdown some of the existing barriers between financial consumers, writers and institutions.)

Potato had this to say:

I’m a current TD Waterhouse customer, I love ’em, and recommend them to all the newbie investors I talk to. The main reasons being e-series index funds and customer service.

• From what I’ve seen of RBC and CIBC, the trading platform is just ok, but does the job for normal occasional traders. No L2 quotes available for normal accounts, and you have to manually hit refresh to see the real-time quotes. From what I know, they do have a separate advanced platform for day traders.
• Customer service is excellent. Phone wait times are a bit longer than with RBC, especially the first week of January when people are phoning in to make in-kind TFSA contributions and clogging up the system, but the quality of the reps makes up for it, especially in helping out new customers. They’ve always gone the extra step for us to solve problems. Examples: one friend set up a Waterhouse account, but forgot to sign up for the electronic statements to get the annual fees waived. When the first fee hit, he called up, explained his stupidity, and they helped him sign up and reversed the charge without asking. They’re very patient with new investors.
• Research is mixed: they do have a good selection of in-house and 3rd-party research available, some market commentary pieces, etc. Their in-house research team generally seems to have their heads on their shoulders. They don’t keep old research reports up though, so if they publish a nice 3-page report on a company, and you want to go back and look at it a month or two later, but in the meantime they’ve published a 1-paragraph note on a takeover or something, the older reports will be gone. They also put all their research from a given day into a single PDF which is kind of weird, but not necessarily bad (makes it easy to grab everything for the day that morning).
• I am paradoxically both an active and passive investor. As an active investor I don’t trade much though. As a passive, I use the e-series funds, which are great for small amounts and regular contributions.
• TD Waterhouse does have some weirdness with cash transfers: even coming from a TD Bank account, the cash won’t show up in your activity/account until the next day. For cash coming from PC Financial, I find it takes 2 or 3 days to show up, and when it does it’s back-dated to the day or day after the transfer was made, which is kind of strange. My friend said his very first transfer from PC to TDW took a full week, with others acting like mine usually do.
• Forex fees are on the high side, I think about 1.5% each way. To help offset that, non-registered accounts can have a USD account to reduce conversions, and registered accounts can wash trades with a phone call.
• I think other brokers have the same service, but you can set up email alerts with them, which will send you an email when a stock crosses a price target you set, and will also forward press releases and articles from the globe in which the company is mentioned.

Jungle had this to say:

• Platform looks rather basic and plain, sometimes simple is better.
• Customer service is amazing, I don’t cringe if I have to call them. I cringe when I have to call Scotiabank.
• Just a few stocks and mutual funds (e-series).
• I’m concerned about the costs from currency conversion and holding usd funds in RRSP.

Plugging Along had this to say:

• I found the trading platform very simple, and easy to use. Not a lot of bells and whistles, but I just want to trade not be entertained.
• Customer service – I LOVE IT. They are easy to get through to. The staff is relatively knowledgable. They were quick to set up my account. Also, when I was over charged on my trades (there was a valid reason), a quick phone call to their centre and it was resolved. They have never argued about charges. I compare them to Questrade, and BMO, and a couple of others where we have not enjoyed working with.
• I don’t use a lot of tools other than the real time updates, and it’s pretty quick.
• I totally recommend TDW, their service is really good.

Scotia iTrade announced that they have just joined the US$ RRSP party. They are a bit late considering that Questrade was the first brokerage to offer a US$ RRSP three years ago and RBC Direct and Qtrade have also offered a US$ RRSP account for some time.

With friends like this, who needs enemies? Anonymous

They are offering a “U.S.-Friendly RRSP”, which is a special program to give a better currency rate for investors selling and buying US$ securities in their iTrade account. This feature is optional and costs $30 per quarter, which of course, works out to $120 per year.

Read my Scotia iTrade discount brokerage review.

Why would you want a US$ RRSP?

Traditionally, all RRSP accounts settled all their trades in Canadian dollars. The problem is that if you sell a US$ security, you have to pay a currency conversion charge when the proceeds get converted to Canadian dollars. This fee can be quite significant.

If you would like to compare the different exchange rates offered by all the Canadian discount brokerages, check out the Canadian discount brokerage comparison.

If you want to buy another US$ security, the money will get converted to US$ again and another currency conversion fee will be charged. Doing this “round trip” can easily cost 3 or 4%, which is a significant drag to your investment performance.

Questrade discount brokerage created Canada’s first US$ RRSP account where you can choose the settlement currency and avoid all currency exchange fees if you are selling and buying US$ stocks. You still have to pay currency exchange fees for new Canadian dollar contributions, but once the money is converted to US$, it stays in US$ and there are no currency exchange fees.  They also accept US$ contributions and no conversion is required.

Read my Questrade discount brokerage review.

Scotia iTrade US$ RRSP still charges currency exchange fees

According to the Scotia website, if you sell a US$ stock or ETF – a Scotia Capital currency conversion rate (SCI rate) will still be charged. I phoned Scotia and a rep told me that this rate will be about 0.5%.

This means that if you sell a US$ stock and then use the proceeds to buy another US$ stock, your total currency conversion cost will be approximately 1.0%.

The regular Scotia iTrade currency exchange rate is 1.5% to 2.0%, which is one of the highest in Canada. The exact rate depends on the size of the transaction.

Under the regular Scotia rates, an investor who sells and buys a US$ security will pay total currency conversion rate of 3% to 4%. With the new “friendly” program, that same investor would pay 1% conversion rate.

A 1% currency conversion rate is far superior to a 3%-4% currency exchange rate. On a $25,000 sell and buy, an investor would save $750 to $1000, depending on the exact exchange rate. Yes, currency exchange fees are that high.

Is the Scotia iTrade US-Friendly RRSP a good deal?

This program is a good deal if an investor meets the following conditions:

• Already a customer at iTrade – This feature is certainly not worth switching to iTrade for. If you are currently paying a lot of money in your RRSP for currency conversions, you should look to Questrade, RBC Direct or Qtrade to save money.
• Savings from lower exchange rate on US$ sell/buys is greater than $120 per year – Even if you are an iTrade investor – make sure you are paying enough conversion fees to make the program worthwhile. If you only purchase Canadian based equities, this program won’t save you any money. Note that the security has to actually trade on a US$ exchange for currency conversion to be relevant. If you own an ETF based in Canada, such as the iShares XSP S&P Index ETF – this trades in Canadian dollars, even though it is based on a US stock index.

If you would like to compare the different exchange rates offered by all the Canadian discount brokerages, check out the Canadian discount brokerage comparison.

Some of you might be familiar with locked-in RRSP or RRIF accounts, otherwise known as LIRAs, LIFs, LRIFs, PRIFs and probably a few other choice names as well. These are basically RRSP or RRIF accounts that are locked-in so that the owners can’t get access to the money until retirement age. Even in retirement, the withdrawal amounts are limited.

The idea behind locking in the money is to protect the account owners from prematurely draining their retirement accounts and burdening government support programs such as GIS, in their old age.

How do you end up with a locked-in RRSP?

Employees who work for a company that offers a defined benefit pension plan (such as the government), will build up pension credits over time. If the employee should leave the job, they have a choice of:

1. Leave their accumulated pension credits in the pension plan and collect a pro-rated pension at retirement age.
2. Transfer the “commuted” value of their pension credits to a locked-in RRSP account which is called a LIRA (Locked-In Retirement Account)

If they are close to retirement age, option 2 is usually not available.

Contributions to a defined benefit plan need to be locked-in

If you are an active non-retired member of a defined benefit pension plan, you make contributions to the pension plan. The money you contribute is locked-in. You can’t withdraw it unless you leave the company and are eligible to transfer your pension credits out.

Money in a pension plan must be locked-in because of something called mortality credits

For an excellent description on mortality credits, please see the Oblivious Investor article on annuity payouts.

Very simply put – In order to run a pension plan properly, the administrators need to have some assurance that the money in the plan won’t be arbitrarily withdrawn by members. This is similar to buying an annuity. Once you buy – you can never undo the purchase. To do be able to do so would make it impossible to manage the annuity properly.

If an employee leaves the company and transfers their pension credits out – there is no necessity to keep the money locked in.  Because it is not part of a pension plan, mortality credits and any other pension-related reasons for locking in, no longer exist.

What if the money is unlocked and the former employee spends it all?

One might make arguments that the accounts should be locked-in to protect the investor from themselves. If the accounts are unlocked, the investor might cash out and not have enough money for retirement.

But what about regular RRSP accounts? Are they locked-in? Should the government make all rrsp accounts locked-in so that the investors are “protected” against themselves?

I don’t think so either. And it doesn’t make sense to me that people who make contributions to an RRSP account have complete freedom over their money, whereas someone who contributed to a DB pension plan and then converted it to a locked-in RRSP account (LIRA), does not have complete freedom over their money.

Both investors might have contributed the same amount, over the same time period and ended up with the same investments in very similar retirement accounts. But one can withdraw any amount from their account anytime, the other can’t.

Employee chooses between annuity (pension) or RRSP

When an employee leaves a pension, they make their decision to keep the money in the pension plan and collect a pension later, or they choose to remove the money from the pension plan and make themselves responsible for the money.

This choice is similar to a retired person who has to choose between using some or all of their investment portfolio to buy an annuity (guaranteed income), or keep the money in their RRSP or RRIF account.  If they choose the annuity, the money is used to buy an irreversible annuity which will have guaranteed income for life.  If they choose to keep the money, they will be responsible for looking after the administration of the retirement account as well as withdrawals.

If the employee chooses not to remain in the pension plan, they should be able to transfer their pension money into a regular RRSP, where they will have full control over the investments as well as withdrawals.

Locked-in retirement accounts should be under federal rules

One last item, while I’m on the topic – Why, oh why are the locked-in retirement rules under provincial jurisdiction?  The rules for withdrawals are different for every province.  This is silly.  If you have a TFSA or an RRSP – it doesn’t matter where you live, the rules are the same.  Locked-in retirement accounts should also have the same rules, regardless of which province the locked-in money originated from.

Or better yet – just eliminate locked-in retirement accounts!

One common question regarding the TFSA (Tax Free Savings Account), is

How old does someone have to be to open a TFSA account?

Given that this is Canada, the answer is not as straight forward as you might think.  Basically, you have to reach the age of majority in order to enter into a financial contract, which is what happens when you open a TFSA.

The problem is that the age of majority is determined by each province and territory, and they are not synchronized.

First, let’s cover two quick TFSA rules:

1. $5,000 of TFSA contribution room is accrued each year starting when you turn 18 years of age or 2009, whichever is later.
2. You need to be a Canadian resident to open up a TFSA account. Here is a link to the official Canadian resident definition.

At what age can someone open a TFSA (Tax Free Savings Account) in Canada

Some provinces allow 18 year olds to open a TFSA account, but in other provinces you must wait until you are 19 years of age.

Here are the provinces that allow 18 year olds to open a TFSA account:

• Ontario
• Quebec
• Alberta
• Manitoba
• Saskatchewan
• Prince Edward Island

Here are the provinces/territories that only allow 19 year olds to open a TFSA account:

• British Columbia
• New Brunswick
• Newfoundland and Labrador
• Northwest Territories
• Nova Scotia
• Nunavut
• Yukon

It is important to note that the annual TFSA contribution room will accrue from the 18th birthday, even if you can’t open up an account until the following year.  If you live in a province where the age of majority is 19, you will not lose out on any TFSA contribution room – but you will have to wait an extra year to use it.

Example 1:  Person turns 18 in province where age of majority is 18

Steve lives in Ontario (age of majority is 18) and turned 18 on June 1, 2011.  Starting on his 18th birthday, Steve can set up a TFSA account and contribute a maximum of $5,000.  On January 1st of 2012, he gets another $5,000 of TFSA contribution room and can contribute another $5,000.

Example 2:  Person turns 18 in province where age of majority is 19

Ann lives in Nova Scotia (age of majority is 19) and also turned 18 on June 1, 2011.  Starting on her birthday, Ann now has $5,000 of TFSA contribution room, but is not allowed to open up a TFSA account because she has not reached the age of majority.  On January 1st of 2012, she gets another $5,000 of TFSA contribution room for a total of $10,000.  Ann turns 19 on June 1, 2012 and can finally open up a TFSA account.  At that point, she can contribute up to $10,000.

Example 3: Person turns 18 before 2009

Susan lives in Canada and turned 18 in 1998.  She started accumulating TFSA contribution room in 2009 (the first year of the program).  In 2012, Susan decides to set up a TFSA account.  She has a total of $20,000 of contribution room ($5,000 each year for the years 2009, 2010, 2011 and 2012) and can contribute up to $20,000 in 2012.

More information

TFSA Government age and residency information

TFSA rules and contribution limits

A while back I wrote about a TFSA transfer strategy which I came up with called the TFSA December Strategy.

If you own an investment account and want to transfer it to a new financial institution, typically your current brokerage or bank will charge a transfer fee.

If you want to transfer a TFSA account, you have the option of selling the investments in the TFSA account, do a cash withdrawal near the end of the year, open up a new TFSA account somewhere else, and then contribute the cash to the new account in January of the following year.  This will allow you to avoid paying the transfer fee.

Not surprisingly, I wasn’t the only one to think up this idea – Canadian Capitalist has written about it and even came up with a better name – the TFSA December Shuffle.

It isn’t always the best move

The problem with this strategy is that if you own securities in your account that have trading costs, such as stocks or ETFs – you might find that the costs of selling and then re-buying end up being more than the transfer fee you saved.

Another factor, is that most brokerages will cover your transfer fee if you move enough assets to them.  At the moment, most TFSAs are not that large, but in a few years they will be.

TD Waterhouse has started charging the transfer fee if you do an all redemption from a TFSA, so it seems that the brokerages have caught on to this strategy.  Find out how your brokerage handles this situation.  If necessary you can leave a few cents in the account to avoid the fee.

The strategy is only worth doing if

• You can’t get the new financial institution to cover the transfer fee
• The trading costs are less than the transfer fee.  Don’t forget you have to sell the securities and buy them back again later.
• If you have a high interest savings account, this strategy is perfect because there are no trading fees.

Consolidate TFSA into non-registered account

Another idea (which I learned from the Canadian Money Forums) is to consolidate the TFSA into your non-registered account, temporarily, in order to reduce the number of transfer fees to be applied. This might make sense if your new brokerage will only pay for one transfer fee, or if you have so many securities in your open account, that doing an in-kind transfer is the only reasonable option.