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August 20, 2019 | Nope

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.

When Stephen Harper handed me my (shapely) butt for the high crime of democratic blogging, throwing me out of the Conservative caucus to live under a bridge, all was not lost. As I have mentioned before, the next federal budget from the elfin deity known as F bestowed the TFSA upon a needy nation. I’d lobbied the finance minister hard to do so. And, lo, it came to pass. Vindication.

Well, it’s been a decade now since the first tax-free account opened. Jim Flaherty’s gone (…kinda miss him…). Harper lurks around the web like a creepy clown. And I write a pathetic blog featuring debates on short people and dogs. Sigh.

Well, we need to talk about TFSAs, Canada. You’re totally screwing this beautiful thing up.

A poll this week confirmed what’s been hinted at here for a while. This glorious money machine, custom-made for moisters to amass wealth and for wrinklies to game the system is being treated like a giant, withered, dried-up bank savings account. In fact, TFSAs are so abused they might just be making us all poorer. That’s because for the first time more people have one of these than an RRSP. And while registered retirement plans are usually full of investment assets of some kind, the TFSAs are loaded with… (yuck) cash.

The miserable findings: 43% think a TFSA is for saving, not investing. Almost 60% have just cash or brain-dead GICs inside their plans. An astonishing 50% of Millennials hold only cash – nary an ETF or even a mutual fund. Six in ten say their TFSAs are for emergencies (nobody ever has one) or just for saving money. And women – who live longer and need more financial structure as a result – are the worst abusers. Only 4% have ETFs (as opposed to 10% of men) and 11% hold stocks (men are at 28%).

What a waste. High-interest savings accounts and GICs barely pace inflation, and rates of return will be falling even lower in the months to come. Lost on most is the fact money multiplies fast inside a TFSA, and can then provide decades of cash flow in retirement that doesn’t count as income and won’t reduce your Old People government pogey.

The contribution limit is now $63,500, or $127,000 for a couple. Starting to be serious money. If you maxed out, added $6,000 a year each for 20 years and achieved an average return of 7% in a balanced portfolio, that would become $983,400, or which $616,000 is tax-free growth. At age 65 the TFSA alone would generate $59,000 a year in eternal income. Add in your CPP and OAS (untaxed) and that becomes an annual income of almost $93,000. And it’s assured the pogey payments in two decades will be higher.

Meanwhile if you’re a moister with 40 years to retirement and can find $115 a week ($16 a day – two grams of weed) for your TFSA, and keep the money invested in ETFs making you a long-term average of 7%, the account will be worth $1.3 million at 65. A million of that is free growth. That’ll generate about $85,000 a year – plus whatever else you save, plus government pensions. This equals having an RRSP with over $2 million in it – and to stuff that you need a high-paying job most of your working life.

See what I mean? The fact people are far from maxing out contributions and keep half or two-thirds of that TFSA money in cash, considering it as a slush fund for the cat’s urinary tract operation, is enough to make F roll in his grave. Just as bad was the attitude T2 showed when he chopped the contribution room in half and intimated TFSAs were only for the rich. Leaders should be encouraging people to be free, secure and independent rather than wards of the state.

TFSA stuff worth remembering: open one for you, another for your spouse and adult children. Money given to them will not be attributed back to you, nor will any of the tax-free growth. Contribution room is never lost (as with an RRSP). But money removed can be returned (unlike an RRSP), so long as you wait until the next calendar year. If you live in Canada for all or part of a year, you can contribute – it matters not how much you earn. That makes the TFSA far more democratic and progressive than the RRSP, which favours rich dudes. Nothing earned in the TFSA is taxed. But you can’t deduct losses from gains – so no dodgy investments. And a TFSA can be passed on in whole to your spouse if you list them as a ‘successor holder.’ A named beneficiary, on the other hand, gets the money but loses the tax-free status upon death.

So there. A tax-free savings account is not a savings account. Get over it.

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August 20th, 2019

Posted In: The Greater Fool

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