#MakeItMakeSense is a weekly series from the Star that breaks down personal finance questions to help young Canadians gain more confidence and understanding around financial literacy.
This week, we tackle some of our readers’ burning questions, from what happens to losses in a Tax Free Savings Account (TFSA) to how to choose where you put your money.
To #MakeItMakeSense, we brought in money expert Jessica Moorhouse to break it down and give us her best pieces of advice.
“What happens to losses in a TFSA account? For example: If I have invested the full amount over the years but suffer stock losses within the account, then what? I know I can’t deduct the losses but can I top up the account in a later year to equal the losses?” — Dan from Burlington
TFSAs can be great to grow your money tax-free but one of the downsides is if you do experience investment losses, like seeing a stock you bought depreciate in value. Unfortunately, you can’t deduct those losses on your tax return like you can inside an unregistered account, Moorhouse says.
“Let’s say you sell that stock and pull out the remaining cash from the sale from your TFSA. Not only have you locked in that loss, but you’ve lost that TFSA room too,” she said. “You won’t be awarded more TFSA room because of your investment loss.”
Moorhouse says the only options people have are to either wait and see if that investment recovers in value, or sell the investment and use the proceeds to buy another investment that will grow in value inside your TFSA.
“What are the pros and cons of dividing one’s investments between two financial advisers/institutions? I’m not comfortable putting all my money in one place. I currently have my RRSP managed by one adviser and would like to start a non-RRSP TFSA with another. What tips do you have on choosing where to put your money” — Terri from Toronto
“Since you mentioned you weren’t comfortable putting your money in one place, this leads me to believe you’re concerned that your money isn’t safe. Remember, there are organizations that exist to protect your assets in case of bank failure, such as CDIC, CIPF, MFDA IPC, and Assuris,” said Moorhouse.
Having your funds at more than one financial institution actually provides more protection if you’ve reached the dollar limits for each member institution, she explains.
For example, CIPF only protects up to $1 million for registered accounts, plus $1 million for general accounts, plus $1 million for RESP, per individual per member firm, she explains. These organizations however do not provide protection from investment losses due to events in the market.
Moorhouse also clears up another misconception: having your money at multiple institutions isn’t “diversification.”
“Diversification isn’t about the institution you use, it’s about the assets you’re investing in,” she said.
“For example, you can have your money with advisers at two separate firms, and they very well could put you in similar portfolios with similar assets thus not providing you with any more diversification than what you already have.”
Moorhouse says if you want more diversification, you should take a look at your current portfolio and discuss this with your adviser. You may also want to consider investing in alternative assets to diversify your portfolio more such as real estate, precious metals, collectibles, and commodities, she adds.
“The best way to determine where you should put your money is by having a strong investment plan. What are your goals? What is the proper asset allocation for your portfolio? What investment strategy are you following (i.e. passive vs. active),” she said.
“Most importantly you should be asking yourself ‘why am I not comfortable having my money where it is?’ It could be due to you not feeling supported or heard by your current adviser.”
“Approximately $60,000 was withdrawn from my TFSA last year (2021). Revenue Canada has not updated my account for this amount. My account indicates a contribution of $10,000. Can I go ahead and invest the other $50.000 this year? and not be penalized.” — Harold from Cobourg
The CRA can take a while to update your posted TFSA contribution room inside your CRA account.
“That’s why it’s so important to track your TFSA contributions and withdrawals throughout the year so you know exactly how much room you have at all times,” she said.
If you’ve been waiting a long time and still have not seen updates, “make sure to reach out to your financial institution to see what is going on. There could be a reporting error or a delay for some reason,” she says.
For instance, if you withdrew $60,000 in 2021, you should get that $60,000 in TFSA contribution room back at the start of 2022, Moorhouse says.
If your CRA account says you have $10,000 in contribution room available, first check to see if this is unused room from a previous year or this is a portion of your $60,000 that you withdrew in 2021.
“I say this because if it’s simply unused contribution room, then you could have $70,000 available,” she said. “If it’s not unused contribution room and it’s just a part of your $60,000 withdrawal, then yes, it would be safe to assume you can contribute $60,000 in 2021.”
It’s also important to not forget the $6,000 TFSA dollar amount you get at the beginning of the year, which could mean you actually have $66,000 in room available, Moorhouse says.
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