Valley First Helps Young Investors Avoid Costly TFSA Mistakes

PENTICTON, BRITISH COLUMBIA--(Marketwire - Sept. 13, 2012) - When the tax-free savings account (TFSA) was rolled out in 2009 it was praised for its simplicity. However, more than three years later, many young Canadians are still having trouble managing their TFSAs.

Recently, the Canada Revenue Agency sent warning letters to about 76,000 people reminding them of TFSA contribution rules. While this number is down from more than 100,000 last year, many young investors are still left trying to understand how TFSA penalties can be avoided.

"If you look at the available investment options, the TFSA is still very much the new kid on the block," says Darren Bitzer, an investment specialist with Valley First. "It's important to talk to an expert to get the most out of your investments. A little knowledge can help ensure your hard earned cash stays in your back pocket."

Valley First has found the flexibility of the TFSA appeals to younger investors - those starting out in the workforce, saving for a down payment on a house or putting money aside for their young families. This is also the group that is most affected by unexpected tax penalties.

"We've seen a growing number of young people turning to the TFSA over more traditional investment products like RRSPs," says Bitzer. "When you are doing your best to get ahead financially, any setback can not only be significant it can also be disheartening."

In a calendar year, account holders can invest up to $5,000 in their TFSAs. All income earned on the money invested in a TFSA is tax-free, as are withdrawals. Unused contribution room is carried forward and accumulates in future years. However, if account holders withdraw funds, they can only be replaced if they stay under their $5,000 annual limit.

"The TFSA initial contribution room is quite straight forward," explains Bitzer. "It's when you start making withdrawals and re-investments that you can blow your contribution room. If you take any cash out of your TFSA, you can only reinvest up to the annual $5,000 limit and any additional contributions must be held over to the next calendar year. For example, if you invest $3,000 then withdraw it all, you can only re-invest $2,000 in that year as the contribution room is cumulative."

Bitzer points out the cumulative investments can become even more complicated when investors have multiple TFSAs at different financial institutions. The $5,000 contribution applies to the total of all TFSAs not individual TFSAs.

"Some people can be hit with over contribution penalties if they don't share their full investment portfolios with their advisors," says Bitzer. "At Valley First, we look at our member's total financial picture. By taking into account all investments, we can help eliminate the over contributions and the nasty penalties that go with them."

According to the Canada Revenue Agency, more than $60 billion in assets is currently held in TFSAs. Over contributions are taxed at a rate of one per cent for each month there is an over contribution. For example, if a $500 over contribution was made in September, a TFSA holder would face a tax penalty of $20 - calculated as one per cent of $500 (or $5) for four months.

"Depending on your over contribution amount and the length of time your TFSA balance remaining over the limit, tax penalties can be significant," says Bitzer. "This can be a real financial hit, especially to young people and families. It's best to avoid penalties altogether by speaking to an expert."

Valley First is a division of First West Credit Union, B.C.'s third-largest credit union, which has 37 branches and 29 insurance offices throughout the Lower Mainland, Fraser Valley, Kitimat and Okanagan, Similkameen and Thompson valleys. Led by Launi Skinner, First West has approximately $6.6 billion in assets under administration, more than 169,000 members and close to 1,400 employees.