The article “Can I Reset My TFSA?” was originally published on MoneySense on November 8, 2016.
John has lost money in his TFSA and he wants to figure out the best way to make lemonade out of his lemons
Q: I have a question on TFSAs. I have lost money on mine and I know you can’t claim losses, but can I liquidate my TFSA and start over with the full amount in 2017 of $52,000?
A: Even though you don’t invest in stocks with the intention of losing money, about ¼ of the time, stocks go down. As you know, John, you can’t make much money investing without taking on some degree of risk – especially in this low-interest-rate environment.
When you sell an investment at a loss in a non-registered account, you can claim a “capital loss.” Capital losses are deductible against capital gains in the previous three years, the current year or a future year. So despite capital losses being an investment failure, they can be a tax-savings success.
As you mentioned, John, you cannot deduct capital losses on investments in your TFSA or RRSP on your tax return. Does that mean you shouldn’t take on any risk in your TFSA or RRSP?
In a perfect world, we’d all have maxed out TFSAs and RRSPs and large non-registered accounts. If someone had a large portfolio and could hold all of their stocks in their non-registered account and all their safe, fixed income in their RRSP, it would be a very tax-efficient way to invest.
TFSAs, however, are unique. Tax-free growth is great. But holding fixed income in your TFSA when stocks rise ¾ of the time may not be optimal. Furthermore, a large tax-free account due to stock market growth means TFSA investors should consider stocks – and risk – in these accounts.
I’m afraid liquidating your account and starting over in 2017 won’t work, John. Your TFSA contribution room is calculated based on your cumulative TFSA room since 2009, which for those who were over the age of 18 in 2009 and have lived in Canada for all those years would be $52,000 as of January 1, 2017. However, it’s $52,000 less your contributions plus your withdrawals.
So if you have always maxed out your TFSA, never taken withdrawals and your account is worth $30,000 and you withdraw it, you don’t hit reset by cashing out. You’ll just get back your $30,000 of TFSA room next year if you take a $30,000 withdrawal this year.
I think an important consideration for you, John, is why did you lose money in your TFSA? Were you in speculative stocks? Were you not well diversified? Or is this a temporary decline that a stock investor needs to accept if they’re willing to invest in stocks in the first place?
I find investors think irrationally sometimes, including about stock market losses. Sometimes, a stock, a sector or even entire stock markets being down shouldn’t be viewed as a sell signal, but rather, a buying opportunity. After all, something you were willing to pay more for yesterday is on sale today.
TFSA investors, in my opinion, should try to ensure their account is diversified and look at their TFSA in relation to their other investment accounts. Figure out the best place to hold all of your investments, whether TFSA, RRSP or non-registered.
And if you are going to need to withdraw from any of your accounts anytime soon, take that into account as you pick your investments. Limit your stock exposure and ensure you have enough safe investments in accounts you will be drawing on in the next five years. If you have a medium to long-term timeframe and a diversified stock portfolio, that should give you enough time to recover from any losses.
You only make temporary stock markets losses permanent when you buy stocks in accounts you need to withdraw from in the short-term; or if you take on too much risk for your comfort level and panic and sell when stocks are down; or put money into speculative investments that you should be prepared to lose money on in the first place.
Don’t be scared to lose money when you invest, John. But try to take steps to maximize your investment returns and tax savings – especially in your sacred TFSA.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.