Don't let your enthusiasm for the new tax-free savings account overwhelm your natural and certainly justifiable wariness about fees charged on financial products.
TFSAs officially make their debut on Jan. 1, but a lot of banks are getting a head start by inviting customers to preregister for an account. From the sound of it, people are really latching on to the TFSA.
The online bank ING Direct reports that almost 170,000 people have signed up for TFSA accounts since they were introduced in early October.
“We've actually been a little bit surprised by the overwhelming response,” ING president Peter Aceto said. “Our existing customers, and new customers, have flocked to the new tax-free account.”
“Scotiabank has been offering TFSA preregistration since late September and we are very pleased with the uptake,” said Gillian Riley, senior vice-president of retail deposits at Bank of Nova Scotia.
“The numbers have exceeded both our projections and expectations.”
Over at Canadian Imperial Bank of Commerce, spokesman Rob McLeod described client response to the TFSA as outstanding and said the bank is adding resources to keep up with the demand.
Go on out and get a TFSA, by all means. Sign up now, avoid the rush. And don't forget to ask about fees because while the TFSA is most certainly tax-free, it's not always fee-free.
Banks have just started announcing their TFSA fee policies, and there may be fine-tuning ahead. So far, there are two main types of fees that you need to ask about, the first being an annual administration charge. TFSAs are tax-sheltered accounts like registered retirement savings plans, and thus require financial institutions to do some fairly extensive record-keeping and reporting to the Canada Revenue Agency. This opens the door for the same kind of annual fees that are common with RRSP accounts.
The second TFSA fee to worry about is a charge for making withdrawals from a plan. Pay attention here because a key feature of the TFSA is that you can pull money out and then recontribute it later.
TFSAs allow anyone 18 and older to save or invest up to $5,000 a year and pay no taxes on any gains. As with an RRSP, TFSAs can be simple and conservative or more sophisticated. You can base a TFSA on a high-interest savings account or guaranteed investment certificates, or put some aggressive stocks in it.
The kind of savings or investment vehicle you use for your TFSA will have a major effect on the fees.
Planning on a conservative TFSA using GICs, high-interest accounts and mutual funds sold by banks? Generally, TFSAs available through banks will have no annual administration charges, and no fees for making a withdrawal.
Mr. Aceto said ING's decision not to charge fees on its TFSA was an easy one because of the company's policy of having no fees on other products, such as its high-interest savings account.
“We decided that yes, there's a little extra work for us to do with tax-free accounts, but we're not passing those fees along to customers,” he said.
Scotiabank has no annual administration or withdrawal fees on its TFSA, and neither do Bank of Montreal, CIBC, HSBC or Royal Bank of Canada. Toronto-Dominion Bank's TD Canada Trust division will charge no admin fee and will allow one free withdrawal a month ($5 apiece after that).
The TFSA fee-free zone ends when you move up from a bank to its discount or full-service brokerage divisions, where you'll have access to a much greater selection of investments.
BMO InvestorLine, the discount brokerage arm of Bank of Montreal, has a withdrawal fee of $25, as well as an annual administration fee of $50. The annual admin fee will be waived for all new clients in the first year, and subsequently for clients with $100,000 in total assets at the firm.
At BMO Nesbitt Burns, the full-service investment dealer in the BMO family, the annual TFSA fee will be $50 and withdrawals will cost $15.
The discount brokerage and financial planning arms of TD Waterhouse have a $50 annual fee, but it's waived for clients who have $100,000 in total assets. Discount brokerage clients can also get their fees waived if they use the e-services option, where client statements are delivered in electronic form instead of on paper.
Among the discount brokers that are not planning to charge TFSA admin fees are RBC Direct Investing, ScotiaMcLeod Direct Investing and HSBC InvestDirect.
Wherever you intend to set up your TFSA, consider the fees that will apply and the extent to which they will undermine the value of this account to you.
If you're going to use a full-service or discount broker, a $50 fee on the maximum annual contribution is like a 1-per-cent penalty on a $5,000 contribution.
Add a couple of withdrawals over a year and fees could be an even bigger drag on performance.