Within a tax-free savings account (TFSA) invested in exchange-traded funds (ETFs), if you sell a specific ETF that might not have a good near future outlook and take this balance within the TFSA and invest the money again in another class ETF with a better outlook, does the sale and reinvestment affect your overall lifetime limit? Or is the limit only affected if you take the profits from a sale out of the account and then later put it back in? Also, does the reinvestment of dividends affect the yearly and overall limits assuming you are already putting the maximum monthly [limit] allowed into the account? What is the effect on the limits if you decide to withdraw the limits?
Sonia du Plessis - Brenthurst Wealth
Once you have money invested in a TFSA, you can move between ETFs as you wish. It will not affect your annual or yearly contribution limit. Just keep in mind that if you buy into a specific ETF, you should do your homework before you buy into the underlying investment.
Ideally you don’t want to make a lot of switches; rather buy and hold with a longer-term view. We tend to wipe out a lot of gains by trying to time the market. It is therefore important to do proper research before you buy into an ETF.
The reinvestment of interest and dividends earned does not affect the annual/lifetime limits.
If however you sell out of the TFSA, and reinvest it at a later stage, that will affect your annual/lifetime limit.
Here are some other specifications of a TFSA:
- The amount that an individual can contribute into this account is capped at R33 000 per annum, and R500 000 over their lifetime.
- There is no withholding tax on dividends or interest, no income tax, and also no capital gains tax on any switches or withdrawals.
- Investors may contribute via debit order every month, to a maximum amount of R2 750 per month.
- The investor can make regular ad-hoc withdrawals at any time. However, he/she cannot re-contribute if he/she has already used up the annual or lifetime contribution limit.
- Parents may make contributions to a TFSA on behalf of a minor, however, proceeds from withdrawals must be paid into a bank account in the minor’s name.
- Legislation does not currently permit transfers between different TFSA.
- Any amount exceeding the R33 000 per year limit will be taxed at a rate of 40%. This means, that if you paid R1 000 over the limit, you will be liable to pay R400 tax. Should investors have more than one savings account, it will remain their responsibility to ensure that they don’t over-contribute to savings accounts they may have with various financial service providers.