The pittance

This week we heard the official inflation rate is 4.7%. Big number. The fattest in almost three decades. But does this tell the story? Not even close. And now the feds are making matters worse.

Food is swelling in cost faster than you can eat it. Houses are up 20% to 30% in a year, depending on your hood. Insurance premiums and gas are ridiculous. Now with the once-in-a-lifetime (we hope) floods in BC the whole supply chain mess worsens. Container goods stranded. A grain crisis. Suddenly – almost everywhere – there are empty store shelves. Not just for made-in-China stuff gone from your local Wal-Mart, but also plumbing supplies at Home Depot and groceries in Kelowna.

Okay, so shortages, rising prices, shelter costs and an energy crunch could mean this has just started. You have two ways of dealing with it. Earn more income. Or invest better.

This week Ottawa unveiled its plan for coping. Here are the highlights:

• Index rate for 2022: it’s 2.4% (the amount of inflation reflected in govy benefits, tax brackets)
• RRSP max contribution limit: $29,210 (from $27,830)
• TFSA contribution limit increase: 0%. Yet again, it’s $6,000.

Because the only egalitarian personal tax shelter we have is the TFSA – with contributions unrelated to income – this sucks. It’s unfair to people who make less and are more impacted when food, shelter and energy go squirrely. But it’s consistent with the long-standing and misguided Liberal war on the Jim Flaherty-created TFSA. It’s petty, political and myopic.

Remember: RRSPs benefit those who make a (relative) bundle. Someone earning over $160,000 a year can salt away the max and write it all off taxable income. That means they pay at least $13,000 less in tax. Moreover, almost thirty grand a year can go into growth-oriented assets and swell in value, tax-free. This contribution may also be whacked into a lower-earning spouse’s account, so the growth (and tax deduction) stay the same but the tax bite is less in retirement, or during a life event.

Meanwhile how about the schmuck working in a warehouse for twenty bucks an hour with a crappy, doomed DC pension plan, renting a 750-foot one-bedder in the burbs for $1,800 a month? Too bad. No tax break for you when investing. And no increase now for years in the amount that can be put into a TFSA. Inflation will just wash over folks like this, especially if they make poor choices – like eating.

Inflation is a tax. For those earning less, a TFSA is essential. RRSPs are a poor second choice when contribution room is thin and there’s little (or no) income tax to reduce. Plus, withdrawals later in life might jeopardize government benefits such as monthly OAS income. People in this circumstance are best to shovel any savings into their tax-free account, grow the money for years free of the CRA, then have income generated in retirement which won’t be counted when taxes are filed.

For example, $200 a month into a TFSA returning an average of 7% can make a meaningful difference to life. Start that at 30 and by 65 the account will hold $343,000 (of which $258,000 is growth). If left invested that would throw off $2,000 a month. Combine it with CPP and OAS (today the average is $1,426 a month, combined) and it creates an income of $41,000. Not great, but ten grand more a year than minimum wage jobs in Ontario or BC are paying. And somebody in that position would have over three hundred thousand in liquid assets tucked away for an uncertain future.

For those of us fortunate enough to use this vehicle to its fullest, the accumulated room for a TFSA in 2022 will soar past $80,000 for the first time. Remember that come January 1st, you can put back into a TFSA everything you might have taken out – including every dollar in growth – plus the new room of $6,000. It’s also possible to fully fund the TFSA of your squeeze, with no growth attributed back for tax purposes. Ditto for adult children.

If you lack cash, use existing financial assets to make a ‘contribution in kind’ to a TFSA. This will trigger tax on any capital gains scored, since the securities are deemed to have been sold then the transfer is made. But all future gains will be untaxed.

For the love of Dog, don’t stick a GIC in your tax-free account, or hold money in one of the banks’ mythical “high interest” vehicles. By choosing to collect ultra-low rates of interest instead of having higher-octane, equity-based ETFs you’re totally wasting an opportunity. In a balanced, diversified portfolio, the racy stuff should always go here. And leave it there. A TFSA is not a bank account to be used for financing holidays or hardwood.

Besides low-income folks, ironically, those next in line to benefit most from a TFSA are the deities among us with government defined-benefit pension plans. For them big RRSPs – which must turn into fat RRIFs – risk pushing them into a higher tax bracket in retirement. But TFSA income – even gobs of it – is available to finance that second Porsche.

What a world.

About the picture: “Here is a picture of our family dog, Colby,” writes Tim from Yaletown in YVR. “He is as charming and loved in his 15th year (16 in Feb) as he was in his first. Keep up the great work!”