December 29, 2019 | The Security Blanket

In a day or two you’ll get the Greater Fool FFPs (Fearless Foolish Predictions) for 2020. Here’s a preview. One of them will be a market melt-up, for at least the first few months of the year. No recession. No shocks. Except Trump, maybe.

How best to take advantage of economic growth, rising asset values with stable inflation and interest rates?

The TFSA, silly. It’s the gift that keeps on giving. Your security blanket – but only if you know the correct strategy. Sadly, 80% of all tax-free moolah in Canada remains in GICs and HISAs meaning most folks will miss this opportunity. Don’t let that include you.

Come Thursday you’ll be able to stuff another six grand into your plan for the year. This brings the accumulated TFSA total contribution room (since it was invented) to $69,500. For a couple that totals $139,000. Add in two adult children, and it becomes even more – potentially over $275,000 for a household. All growing free of tax. And unlike RRSPs, no tax when redeemed.

There are some awesome advantages of the TFSA.

Like, flexibility. Money can come out, then be replaced the next year. No such luck with an RRSP where room is used up and never replaced. For example, this coming week everybody over 18 (or 19 in certain backward provinces) has the ability to put in all missed contribution room from past years + replace all the money withdrawn in 2019 or earlier + this year’s $6,000. So there’s no excuse for having a non-registered investment account, for example, when TFSA room is sitting idle and unfilled. Move it.

The fact TFSA withdrawals are not counted as income and all the growth in the account remains untaxed makes these perfect for retirement planning. Imagine a couple turning their current $139,000 TFSAs into $700,000 in twenty-five years, then drawing out annual cash flow of about $45,000 at the same time they collect average CPP and OAS. That would give an income of almost $80,000, sans tax. For life. No clawback of the government pogey.

Growth is key. TFSAs should always be packed with growthy stuff like ETFs mirroring the S&P, Dow, TSX, Nasdaq or emerging markets. Over the past decades an average return of 7% has been a reasonable expectation for a balanced portfolio, so a 25-year-old contributing $110 a week to a TFSA (and doing no other investing her entire life) could reasonably expect to end up with $1.26 million, a million of which was taxless growth. That would throw off an income of more than $85,000 a year – plus social benefits and the proceeds of whatever crappy corporate mutual fund-based RRSP she was given. How’s that a bad outcome?

If you thought spouses were just handy for a wide range of emotional and domestic services, good news! The TFSA can also help you income-split. Higher-income earners can gift money to their partners to invest in a tax-free account with no attribution back to them (unlike with a non-registered account). The lower-income (or no-income, stay-at-home) spouse can still qualify for spousal tax credits while earning great tax-free returns. Ditto for adult children. Gift them money for their TFSAs. No attribution. But, technically, it becomes their money so you have to be nice.

Speaking of kids, TFSA withdrawals are never taxed and never considered income – unlike what can happen with an RESP, where a portion of the funds attracts tax. So having your offspring open tax-free accounts and keeping them funded for educational costs makes good sense. If they don’t go on to uni, no problem.

Retired and over 71? Then RRSPs must be converted into RRIFs – even if you don’t need the dough. Why not use registered retirement income fund money to fund your annual TFSA contribution, or that of your spouse (or both)? That way you exact a little meaningful revenge with the forced cash flow earning returns Bill Morneau will never see or touch?

Remember this, too: declare your spouse the ‘successor holder’ of your TFSA, not the beneficiary. That way your plan becomes theirs when you croak. Seamless. TFSAs do not enjoy the same exempt status as RRSPs so foreign dividends may attract withholding tax. Plus, don’t overcontribute, or the CRA will send you a nasty letter and demand ransom. Of course, contributions in kind are okay – you don’t need actual cash to fill the plan each year.

So, in summary: if you do nothing else, do this. Open a plan. Fill it. Invest the money, don’t save it. Never spend it. Never miss a year. And don’t be coming to this pathetic blog in 30 years, moaning about poverty. I won’t care.

Garth Turner December 29th, 2019

Posted In: The Greater Fool

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