A reader recently asked me whether he should cash out of his $10,000 TFSA, which earns 0.5% interest, and put it in an opportunity that he says could earn him 30%. He wants to know whether he’ll be penalized if he withdraws his funds. This is an interesting question, but it raises some serious concerns.
There is no penalty for withdrawing money from a TFSA, assuming it is not in a locked-in GIC. Based on the interest the TFSA investment pays, that does not appear to be the case; the investment is probably sitting in a savings account. This can therefore be taken out at any time, and the withdrawal will be added to next year’s contribution room. There are no tax consequences.
But before acting, think about this very carefully and ask a lot of questions. No conventional investment is offering a 30% return. Whatever investment this reader is considering must, by definition, come with a high level of risk. When presented with the possibility of a sky-high return, find out exactly what this risk entails and then decide whether you are comfortable with it.
Also, ask why that investment cannot be make within the TFSA, which would protect any profit from tax. If the security is not eligible for a TFSA, that’s another signal to be ultra-cautious.