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December 18, 2018 | The Gift

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.

Just 13 more sleeps until you can shovel another six grand into your TFSA. Unless, of course, you live in BC. Sadly 70% of people in that confused province say they just don’t have the money to max their contributions. And we all know why.

A decade ago when the elfin deity known as F agreed with me and created the TFSA it seemed like a piffle. Just $5,000 – hardly enough to make a difference to your financial future. But, lo, this pathetic blog disagreed and suggested you max the sucker out, keep it invested in growth stuff, and never withdraw to buy hardwood, Jimmy Choos or a trip to Cuba.

So here we are. The cumulative limit in a few days will be $63,500, or $127,000 for a couple. If you and your squeeze max that and each add six grand a year for the next 30, achieving a 6% growth rate, the retirement egg will be $1.73 million. That will generate $120,000 in tax-free income for the rest of your lives without diminishing the principal, nor reducing your government CPP and OAS pogey. To achieve the same result, you’d need to have RRSPs of at least $2.5 million – which would mean high-paying jobs throughout your entire career.

This is why you must have a TFSA, keep it fully funded, and eschew any silly investment like a GIC.

So how are we doing, as a nation of anxious, financially-stressed beavers?

Notso good. At least according to the latest Big Bank survey (this one from BeeMo). Almost 70% of Canadians have opened a TFSA, mostly at a bank. However over 80% of this money is earning almost nothing, being in HISAs or GICs barely pacing inflation. That’s a long-term fail. And while the total amount people have salted away here has increased a lot (23% in a year), the average is just $27,000, or only half the allowed amount.

Ignorance is also rampant. A third don’t know the contribution limit, while 40% think this is merely a glorified savings account to be used for emergencies (like new snow tires). The main reason for not taking advantage of this gift horse is, as mentioned above, a lack of funds. So, while seven in ten Canadians think they can afford a house, 43% believe they can’t find a hundred bucks a week for their future. Lesson: you reap what you sow.

If this is you, smarten up. There are compelling reasons to stop aggressively paying down your mortgage or renovating the guest bathroom, and direct the money into a TFSA instead.

First, this is the most democratic and universally accessible tax shelter Canadians have ever had. Unlike an RRSP, it matters not what you earned last year – everyone is gifted the same contribution room annually. And it adds up, since the room never expires. Furthermore, you can gift money to your spouse or adult children, and have it grow in their accounts free of tax and with zero restrictions on withdrawals. Sweet.

Also unlike RRSPs, money coming from a tax-free account is not considered income. So people with defined-benefit pension plans, for example, should stuff their TFSAs since the cash stream thrown off in retirement won’t kick them into a higher tax bracket. Another reason to hate government workers! In fact, for most people the taxless aspect of the TFSA is of the greatest benefit since there’s no impact on CPP or OAS. That $120,000 flowing annually to a couple with a $1.7 million TFSA pool won’t result in any clawback of government benefits, while some poor schmuck with a much smaller RSP gets dinged. Unfair? You bet. But everyone has an equal opportunity to accomplish this.

In fact, when you get to be an oxygen-sucking, Depends-wearing, walker-grasping wrinklie, the TFSA party can continue. RRSPs expire at age 71 and must be turned into vehicles throwing off fully-taxable income. But TFSAs are timeless. Contributions and untaxed withdrawals can continue until you drop, then your spouse can take over the account and use it to impress her new boyfriend. Just ensure your partner is listed as the ‘successor holder’ since being a ‘beneficiary’ means current assets must be sold (and then transferred to his/her plan, without tax).

A final big advantage over the RRSP is the ability to pull out funds, then stick them back in when circumstances allow. The only rule is that a withdrawal in one year cannot be made up until the next. So try to time that for December (now) so you’ll have all of the next year in which to make up for the transgression.

In short, if you don’t take full advantage of this tool, you’re kneecapping yourself. TFSAs are not for saving money. Not for GICs or bank accounts. They are not emergency funds. Not for vacations. And not for ignoring. The younger you are, the more powerful the impact. If you do nothing else in 2019 but focus on filling up this one single vehicle, it will be a successful year. Your mortgage can wait. So can the quad, the bike, the RV, the sled or the soaker tub.

Do this. Even in BC. Hell, especially there.

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December 18th, 2018

Posted In: The Greater Fool

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