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ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

December 20, 2017 | Multiply

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Ten years ago Stephen Harper threw my derriere out of caucus for blogging, failing to genuflect when he brushed by, and having an attitude. But at least his feisty little finance minister listened to me (and others) and created a new tax shelter. The TFSA (I called it an investment account, not a savings account) was the centrepiece of a report I gave the guy on how to fix things a little for the middle class.

Other suggestions included raising the GST and lowering income tax; bringing in income-splitting for married couples trying to get by on one income; and seriously revisiting the idea of a flat tax rate for all, with a big deduction for lower-income people, moving towards the idea of a guaranteed income. Well, F adopted the TFSA part, but went on to royally fudge things up by bringing in 40-year mortgages and 0% down payments. After I squawked about it, the writing was on the wall. Garth was pooched.

Ten years later I run a fabulously-lucrative free blog where I have fun every day fighting bigots. What’s not to love? And meanwhile the TFSA has become the single most popular investment vehicle in the land, even though most people squander it. The latest stats showed 15.1 million accounts had been opened in Canada, but just 1.8 million were maxed. Thus, 88% of people have not fully used what is arguable the biggest money machine they’ll ever be given. In fact, four in 10 with a TFSA open somewhere put in zero. Ugh.

In a few days Canadians can stick new money into these plans, and this post is a reminder to do so. If you don’t, spending your cash instead on a Wolf stove, Adele tickets or tokens the Litecoin guy dumped, you deserve the future you get. Why?

The long-term growth, free of tax, is epic. Invest $5,500 this year, then add $100 a week for the next three decades in growth assets making 7%, and you end up with $576,338 of which $414,838 is growth. Besides tax-free compounding of investment returns, the real benefit of this thing is that it will throw off income in retirement (or anytime else) which is not counted as income. So in the example just given, forty grand a year could be earned with zero tax payable on it.

Now let’s look at two 40-year-olds who have wisely maxed their TFSAs with $52,000 in each. If they keep their accounts topped up and full of ETFs giving the same return, at 65 they’ll claim $1.26 million, of which almost nine hundred grand is taxless growth. In retirement that amount can provide an annual income of about $90,000, and these guys can still collect their CPP and OAS without having any of it clawed back (assuming no other income source). If they had $1.26 million in RRSPs, the after-tax income would be about $52,000 and they’d have a marginal tax rate of 29.65%. No contest.

For anyone with a good company pension plan, and especially for the Aristocracy Among Us with gold-plated, defined-benefit schemes (teachers, cops, retired finance ministers) investing in this vehicle is far better than feeding an RRSP. At age 71 all registered retirement plans must be partially unwound, with the income being added on top of pension payments, often boosting you into a higher tax bracket. But no matter how much is skimmed off a fat TFSA, nothing is taxed or even recorded as income.

Of course, TFSAs can be used for income-splitting, too. You can gift your spouse or your adult kids money to invest in one. None of the gains will be attributed back to you. You can withdraw money and, unlike an RRSP, put it back the following calendar year. Unused room can be carried forward indefinitely. And a tax-free account can hold almost any investment asset, so keeping a moribund high-interest savings account or a brain-dead GIC in there is a big fail.

For those who are too afraid to invest because they think stocks markets are high, then ensure you are taking a balanced and diversified approach to protect yourself. That kind of portfolio (40% safe stuff, 60% growth assets) just chalked up a 11% gain in 2017. Not shabby. And if you fear financial markets but are willing to enter a bidding war for a $1.58 million semi held together with pot light wires and bug spit, good luck.

Anyway, the TFSA should be viewed as an awesome long-term benefit to society, kind of like this pathetic blog. Don’t worry if there’s an occasional reversal, correction, implosion or eruption, because over time it’s the single best place you can put $5,500 in 2018.

Yes, little F loathed me, but that’s okay. He gifted us this, and I forgave him.

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December 20th, 2017

Posted In: The Greater Fool

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