It’s time

Despite the fact T2 couldn’t stop himself from diddling with it (for purely political reasons), the TFSA shines. Gutting the contribution limit was petulant and puerile, but it had the desired result. The Libs got elected. Now we have less private savings and more public debt. So Canadian!

Anyway, that blunder’s behind us. Let’s make the most of what we’ve got.

The good news is Canadians have put $45 billion into TFSAs. The bad news is they withdrew $18 billion. The average TFSA has stuff in it worth a little less than $13,000. Of people who have a TFSA (about 11 million) only 17% have maxed. Of all Canadians who could have a TFSA, that equates to 7% who have fully taken advantage of this sucker.

Worst of all, 80% of the money in TFSAs is stuck in GICs, or tragic, interest-bearing, numbing, brain-dead accounts. Why? Because (a) the federal government has consistently portrayed them as savings vehicles whose best use is putting money away for a hot tub, (b) most folks are financial illiterates and (c) they listen to TNL@TB.

But we’re different on this pathetic blog. We know these are money machines whose highest use may be amassing a pile of taxless wealth that can finance retirement and still let you collect all your government pogey.

Imagine you put $5,500 a year into a TFSA, invest for growth, achieve 6.5% and do this for 30 years. That will result in a lump of $511,000, of which $340,000 is growth. Cool. But the best part is that would throw off $33,000 a year, or $2,800 a month in cash flow, at the same yield. If that were your only income, you’d enjoy the full CPP (averaging $900 a month) plus the OAS ($570) with zero deducted. So, on an income of $51,000 you’d pay no tax. Of course, if you and your squeeze did the same thing, there’d be over $100,000 a year to spend.

In other words, if a hundred grand’s enough for you, investing is simple. Find $900 a month between the two of you during your working lives, plop it into a TFSA (in the right stuff), and do nothing else. Of course, lots of people can’t save nine hundred a month because they’ve got fat mortgages or own cats. But, alas, such is life. This is why just a tiny percentage of Canadians have truly harnessed the TFSA. It’s all about choices.

So on Tuesday you can contribute $5,500 for 2017. That brings the accumulated TFSA room for those who (like me) turned 18 in 2009, to $52,000. For a couple, that’s $104,000 and they can also stuff money into TFSAs in the names of their adult children. (Just ensure you gift the cash to your kids, so they make their own contributions rather than transferring the money directly from your bank account. Only in the case of a spouse of common-law partner can you move money directly without attribution.)

Some other things to remember about tax-free savings accounts:

• Unused contribution room (as with RRSPs) never goes away. It accumulates year upon year, usable at any time. Just make sure you file an annual tax return to claim yours.
• There’s no lifetime limit on the amount of contributions (at least for now, depending on how we vote).
• You don’t need money to contribute but can use stuff you already own, such as an ETF, mutual fund or stock. When you flip that into the TFSA, however, a ‘deemed disposition’ takes place, which means any profit will be subject to capital gains tax. But, bummer, capital losses are not usable to offset gains.
• If you contribute too much, count on a big penalty of 1% per month on the excess. Check your status with the CRA, and have last year’s tax return handy when you call. You’ll find out why.
• Money removed from your TFSA creates an equal amount of new contribution room, but only in a subsequent calendar year.
• As mentioned above, any income you receive from a TFSA is non-reportable on your tax return. Therefore it’ll never shove you into a higher tax bracket (like RRSP or RRIF income) or trigger a claw-back of your government wrinklie payments.
• Assets can be removed from your TFSA (such an ETF or a stock) and there’s no tax on any growth that may have occurred while in your account. You can move that into your RRSP (if you have room) and also score a tax refund on the greater but untaxed value. Sweet.
• TFSAs are not for saving. No high-interest accounts. No GICs. No bank savings accounts. Don’t squander this opportunity. Instead, own growth assets such as equity ETFs, and do it in concert with the rest of your investments to ensure you have overall balance and diversification.
• Never use a TFSA to finance a hot tub. There is only one exception.