TFSA (tax-free) transfer

Everybody loves their tax-free account. I mean, no tax, what’s not to love?

But not everybody loves their tax-free provider.

Importantly you are able to transfer your tax-free investment between providers. But there are important T&Cs to the process we’ll detail below.

We use the phrase tax-free account. Others use tax-free savings account (TFSA) and still others reference tax-free investment account (TFIA). It’s all the same.

But first, why would you want to change providers?

• Fees: Some tax-free accounts carry higher costs, especially monthly admin costs. Over a multi-decade investment horizon, the fee difference compounds just like the returns. Just here it compounds out of your hands.
• Wrong product for the goal: Many people opened a bank tax-free fixed deposit or savings account early on. For a long-term investor, interest-bearing cash wastes one of the most valuable features of the account, long-term growth. A transfer lets you move into equity ETFs without losing contributions already made.
• Investment choice: Some providers offer a narrow fund range. Moving gives access to a wider choice.
• Consolidation: Some people opened accounts with several providers and bringing everything into one place makes it much easier to track returns and contributions against the annual and lifetime caps.
• Service or performance: Maybe it’s just about shoddy service which you’re fed up with. Or maybe a horror fund with no options and poor returns.

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The rules (Section 12T regulations)

• Limits: Treasury has stated that a transfer will not affect the annual or lifetime contribution limits, if done via the correct process. This is very important, the correct process.
• Don’t take the cash yourself: Investors MUST NOT transfer amounts into their own accounts outside the tax-free account, because this is treated as a withdrawal. Doing this means the withdrawn amount still counts against your limits, and putting it back in uses up more of your annual and R500k lifetime limits.
• Timeline: The transfer must be completed within 10 business days after the date the investor requested it. This is product dependent, but for cash, ETFs and unit trusts this applies. However as an example, fixed deposits can only move at maturity.
• Certificate: The transferring provider must issue a certificate and send a copy to both the investor and the receiving provider. The certificate must carry the words “transfer of tax free savings account” and state the market value of the assets transferred. This document carries the investor’s contribution history across to the new provider.
• Leaving vs joining: A provider may refuse to accept a transfer based on its product rules, but cannot refuse a request to transfer out.
• Full or partial: Both options are allowed so you do not need to transfer everything.

If you’re looking for ideas on what to buy. We have our weekly ETF column, ETF Database and a Power Hour video and one pager cheat sheet on building an ETF portfolio.

The process, step by step

1. Open a tax-free account with the new provider. Make sure it is set up to receive transfers, not just new contributions. This is the default for new accounts but some providers use a separate account for transfers, check ywith your new provider.
2. Complete the industry-standard transfer request form. This would be provided by the receiving provider. The investor fills in the “transfer from” section with the old account details. The receiving provider completes the “transfer to” section, confirming the account is a Section 12T tax-free account.
3. Submit the form to the old provider. Do this directly or through the new provider, together with whatever FICA or identity documents the old provider requires.
4. The old provider activates the transfer. This happens within 10 business days. It then pays the money or transfers the assets directly to the new provider and issues the transfer certificate.
5. Invest at the new provider and keep the certificate. If cash was transferred, choose your new investments once it arrives. Either way, keep the certificate as proof the move was a transfer, not a contribution.

Important here is that in many cases you could simply be transferring ETFs, cash or unit trusts between providers. But the catch is that the new provider needs to also offer whatever you are transferring in. If you are moving from a unit trust provider to an ETF provider, you’d need to sell the unit trusts and transfer cash. Then once the cash is transferred you would have to reinvest the monies.

Practical pitfalls worth flagging

• Out-of-market risk: Many transfers are done in cash, so the investor sits out of the market for up to two weeks.
• Exit costs: Check for exit fees or notice periods, and for maturity dates on fixed deposits, before starting the process. Ideally there should not be any exit fee, but if there is, then this is in part why you are leaving.
• Don’t double up the limit: The annual limit is per person across all providers. If someone contributes to the new account in the same tax year, it counts against the same R46,000.
• Restricted periods: Providers may refuse transfers in the last 10 business days of the tax year, roughly the second half of February.

Seems complex, but it’s a few forms and maybe an email of three. So get transferring if you’re not happy with your current provider.

Simon Brown

At Just One Lap, we are big fans of passive investment using ETFs. In this weekly blog, we discuss ETFs on the local market and the factors you need to consider when choosing an ETF. If you have wondered how one ETF differs from another, this is where you can find out. We explain which index each ETF tracks, what type of portfolio could benefit from holding each ETF, and how the costs will affect your bottom line.