Tax Free Savings Account - Millionaire on the Prairie

The TFSA Isn’t Just for Savings

Go back and re-read the title until it’s burned into your brain.

A Tax Free Savings Account – TFSA – is a wealth creation tool. So long as your money is under the tax-repelling protection of the TFSA, then the government will not tax your money. The second thing to remember is that the government also will not any money that’s withdrawn from the TFSA.

When the government decides not to tax your money, then you’d better sit up and pay attention.

The TFSA is not just for savings!!! It’s enraging that the Canadian government gave one of the best investment vehicles of all time a name that causes so much confusion. The name leads people to think that savings is the primary use of this magnificent wealth-creation tool.

Believing that the TFSA can only be used as a savings account is wrong.

Why do people think the TFSA is a savings account?

The word “savings” is part of the name of the account. Including this word in the name has caused a great many people to assume that this account is simply a savings account. The government did a disservice to the populace by not calling this a Tax Free Investing Account.

From this moment forward, when you think of a TFSA, I want you to only think about which money-making investment you’re going to stuff into it. Do you want something that churns out dividends every single month, a la an army of little money soldiers? Or would you prefer to buy growth stocks that results in juicy capital gains when you sell them? Perhaps you’re just looking to invest in index funds, mutual funds, exchange trade funds (ETF), or a real estate investment trust (REIT)?

The Tax Free Savings Account is not just a savings account. Any investment that can go into your registered retirement savings plan (RRSP) can also go into your TFSA. Once your investment is inside the TFSA, any and all investment returns will grow tax free.

The other tasty cherry on this particular sundae is that all withdrawals from your TFSA are tax-free as well. Did you happen to invest $5000 into stock of the Next-Big-Thing within your TFSA and that $5000 is now worth $750,000? Well, my friend, I’m happy to tell you that you can withdraw that $750,000 from your TFSA completely tax-free.

Yes – that’s how good a Tax Free Savings Account really is.

Higher tax-free returns are a good thing.

Investments in equities are more volatile, but they have a long-term historical average return that is much higher than anything you’ll get at the bank. Let’s say you decide to buy an index fund that invests in the stock market and you’re going to hold it for 10+ years. Based on historical averages, that investment should return around 8% if held. In other words, so long as you don’t panic during the ups-and-downs of the market and you don’t sell, your investment should return around 8% at the end of those 10+ years.

Find yourself a nice little compound interest calculator. Enter 8% return, a 10-year time period, and the amount of capital that you plan to invest. Write down that number. Now go back to the calculator. Enter the 0.5% return your savings account will pay you, a 10-year time period, and the amount of money that you plan to keep in a savings account. Write down this second number.

I think you’ll find that earning a higher return over the same period of time means that more money will stay in your pocket. Remember that your money will grow without being taxed if you put your investments inside your TFSA.

Consider Using a TFSA for Long-Term Investing

Hopefully I’ve convinced you to look at the TFSA in a new light. If so, yay for me. If not, then so sad for you. The TFSA is a gift – check out this articulate, ascerbic article from Garth Turner of Greater Fool if you don’t believe me.

And it’s a shame that people aren’t taking advantage of it.

To those who’ve been persuaded that the TFSA can help them build wealth, I say the following:

Create a balanced portfolio of investments.***
Put this balanced portfolio inside your TFSA.
Leave the portfolio alone to grow tax-free inside your TFSA.

***What’s that, you say? You don’t know how to create a balanced portfolio of investments? Well, don’t fret. There are ways to learn how to do it. I suggest that you start by reading Garth Turner’s blog – Greater Fool – and learn for yourself. (I am not being paid for mentioning his website.) Remember – you don’t need to pick the perfect portfolio. You need to create a portfolio that you understand: some equities, some bonds, some cash. Those are the three magic ingredients that will bolster your chances of creating some serious wealth for your future needs.

Don’t let analysis-paralysis prevent you from starting to use the TFSA as it was should be used, as a vehicle for you to invest your hard-earned money and to watch it grow tax-free. The TFSA isn’t just for savings!

Do not use your precious TFSA room as a way to shelter money that is earning a very low rate of interest. Bank accounts are for holding short-term money. Long-term money needs to be put into investments. Wherever possible, your long-term investments should be protected from the ravages of taxation.

Tax Free Savings Account – the Gift that Keeps on Giving

Whew! The first three months of 2019 are already in the rearview mirror. Tempus fugit! Am I right or am I right?

A few weeks back, I was happy to report that the Tax Free Savings Account (TFSA) contribution limit was raised to $6,000 for 2019. If you’ve been maxing out your TFSA contribution, then this means that you’ll have to find an extra $600 in 2019 if you want to make the full contribution. At the time of publishing this post, the cumulative contribution room for your TFSA was $63,500.

Year	Contribution	Cumulative Contribution Room
2009	$5,000.00	$5,000.00
2010	$5,000.00	$10,000.00
2011	$5,000.00	$15,000.00
2012	$5,000.00	$20,000.00
2013	$5,500.00	$25,500.00
2014	$5,500.00	$31,000.00
2015	$10,000.00	$41,000.00
2016	$5,500.00	$46,500.00
2017	$5,500.00	$52,000.00
2018	$5,500.00	$57,500.00
2019	$6,000.00	$63,500.00

However, maybe you’re not so fortunate as to be able to make a full contribution this year. Maybe you’re still tackling some debt, or maybe you have other priorities at this time. For reasons known only to you, maxing out the TFSA in 2019 is not on your agenda.

Be that as it may, you should still know the contribution limits. Once your debt is gone and/or your other priorities are met, you’ll have more disposable income. The question then becomes…

Whatever should you do with that extra money?

The Ad Man & the Creditor will encourage you to buy. Buy something – buy anything! They don’t care what you purchase; their sole goal is simply to ensure that your money leaves your pockets as fast as possible and that it winds up in theirs. This is not a good thing!

I’ve talked about possible uses for TFSA money in another post. Today, I’m going to suggest that you keep your money by contributing it to your TFSA. And I’m also going to suggest that, once it’s in there, you should invest it so that it can grow tax-free. I’ll even be so bold as to say that the TFSA is a gift that keeps on giving. If you’re patient enough to invest for the long-term, the TFSA will bolster your other retirement income by creating a stream of money that you can access tax-free.

I’m not a tyrant. I know that after you’ve paid off your debt, you’re going to want to reward yourself for being so diligent and focused. I’m even willing to accept that part of your former debt payment should go towards increasing your standard of living. My suggestion to you is to have 75% of your former debt payment be directed towards your financial goals and use the remaining 25% of that former payment to increase your lifestyle.

Every little bit helps!

Even if you can’t max out your TFSA contributions right now, you should contribute whatever you can so it can grow tax free for as long as possible! As you can easily imagine, taxes are a drag on any investment’s growth. If you have to give 25% to 35% of your investment return to CRA as taxes, then that portion of your money is no longer growing in your pocket. Whenever possible, you should invest within your TFSA so that all of your money is working for you. This is the heart of tax-free investing – you don’t have to send slices of your money to the CRA through taxes. Take advantage of this investing super-power as soon as you can!

And please don’t be mislead by the word “savings” in the moniker. Your TFSA need not be limited to a savings account. You can open a TFSA at any online brokerage and you’re free to hold stocks, bonds, mutual funds, exchange-traded funds, or other investments inside your TFSA. (As an aside, if you’re going to hold US-dollar investments in your TFSA, get professional tax advice. The tax treaty between Canada and the United States doesn’t protect US-dollar investments from being taxed by Uncle Sam.)

Blue Lobster, how do you use your TFSA?

As you know, my personal preference is dividend-paying exchange-traded funds (ETFs). I hold these in my TFSA and I allow the dividends to be reinvested every month. When I retire, I’ll be in a position to withdraw several hundred dollars from my TFSA each month without paying taxes! My TFSA holds many ETF units, each of which pays me a dividend every month. By the time I retire, I’ll have many more such units which means I’ll be receiving many more dividends. And since I’ll have the option of withdrawing them from my TFSA, I won’t have to pay a penny of taxes on my divided income.

Yes, that’s right. Not only will my investments grow tax-free while inside my TFSA, they can be withdrawn from my TFSA without paying taxes on that withdrawal. How sweet it is!

One of my financial fantasies is for my TFSA to grow so large that my monthly dividend withdrawals are sufficient to fund my retirement lifestyle. If I could do that, then I’d never have to pay taxes on that money while maintaining my desired lifestyle! Can you imagine how great that would be?

However, magical thinking won’t assist me to accomplish my goals. Realistically speaking, it is far more likely that my TFSA will supplement my other retirement income streams. That’s a good thing too. Should I be so fortunate as to not need the money from my TFSA, then I’ll just let the dividends continue to compound. After all, I’m not going to waste my dividends by spending them on things that I don’t really want simply because I have them to spend.

The TFSA is one of the very few ways for your money to grow to tax-free. Take advantage of the TFSA as soon as you possibly can! Do what you can to make some kind of contribution to your TFSA. Invest that money wisely then stand back and let your investments compound over time. You will need money tomorrow, so start saving it today.

Savvy Steps for Successful Savings!

Well, 2019 is here and nearly two weeks are under our collective belts. How are you doing with those new year’s resolutions? Or as a witty little photo on Instagram called them: your casual and in-no-way-legallly-binding promises to yourself?

Personally, I don’t make resolutions. Hats off to those of you who do, but I prefer not to disappoint myself on a regular basis. My preference is to consider my options, assess my likelihood of completing one of said options, and then making a plan to complete whichever option I have deemed worthy of pursuit. I do this throughout the year, and I reserve New Year’s Day for family, friends, food, and fun!

This year, I spent part of January 1 listening to Paula Pant. She’s the wise woman behind the website Afford Anything. I’ve been following her for the past couple of years and I have to say that I like the cut of her jib. This year, Ms. Pant released a list of 26 items that you should be tweaking in order to get closer to your financial goals. I would suggest that you give this podcast a listen and figure out which ones work for you.

After listening to Ms. Pant’s podcast, I was very happy to realize that I’m doing, or have done, many of the things that she suggested. For example, I have an estate plan in place. I track my net worth and my daily spending. I’ve implemented the anti-budget into my life.

And if you want to know what I think you should do with your money in 2019, I’ve got my own list. There’s no particular order of importance since I believe that all of these tips will help you to achieve all of your short-term and long-term financial goals. Here you go!

Contribute to your Tax Free Savings Account. The contribution limit for 2019 is $6,000. Your cumulative lifetime TFSA contribution room is $63,5000. If you cannot max out your TFSA, do what you can by contributing as much as possible without violating the contribution rules.
Automate the money sent to your investment accounts and your sinking funds (see item #10). Limit your daily expenses to whatever’s leftover after your automatic transfers have funded your future goals.
Stop paying bank fees by switching your chequing and savings accounts to Tangerine or Simplii. These are two online banks that do not charge fees for deposits, utility payments, debits, transfers, or e-transfers. Remember – paying bank fess is an injury you inflict on yourself!
Cook at home more than you do now. There are literally millions of free recipes on the Internet. There are just as many free cooking lessons on YouTube. Practice makes perfect so get in the kitchen and start preparing homemade food that’s tastier than anything you can buy commercially. To get you started, here’s a marvelously easy recipe that I found for making a delicious buffalo chicken casserole.
Beef up your emergency fund unless you already have 9 months worth of income set aside. If you have to use your emergency funds, replenish these monies as fast as you possibly can so that you’re ready for when the next emergency strikes.
Don’t take on any new debt. If you think you’ll need to buy something significant in the next year, then start saving money for it so that you pay cash – see item #10.
Cut the cord. TV’s purpose is to convince you to spend money. If you cannot cut the cord completely, reduce your cable package and figure out how to stream TV shows from the Internet.
Lower your credit card limits to what you can pay off in full each month. If you can’t pay more than $1,000, $2,000, $3,000, whatever-amount, then that should be the absolute limit of credit available to you. The goal is to stay out of debt. There’s no need to have a credit card limit that’s higher than your monthly take-home pay. A higher-than-strictly-necessary credit card limit is a temptation to spend that you don’t need in your life. Call your credit card company and tell them to NEVER raise your limit without your express request to do so.
Increase the amount of money that is automatically transferred to your investment accounts. See items #4 and #7. Whatever money you’re not spending on eating out can be re-directed towards your investments.
Create sinking funds to pay for annual expenses, such as annual insurance premiums, property taxes, birthdays, holidays, travel, anniversaries, anticipated large purchases, etc…. Allocate money from each paycheque towards theses expenses. When the time comes to pay for them, the money will already be in place waiting to be spent.

Financial goals are rarely attained overnight. You’re the only one who knows exactly what you want from your money. And while I’ve provided you with this little list of money-to-do’s, you’re the person who has to live with your money choices. Hopefully, my suggestions (and those of Ms. Pant!) will take you closer to your financial dreams as you embrace all that 2019 has to offer!

TFSA Contribution Limit Increase for 2019

In 2019, the contribution room for the Tax Free Savings Account increases from $5500 to $6000. This is great news!

There’s a big debate about whether it’s best to invest in a TFSA or in a registered retirement savings plan. I’m not going to weigh in since I’m not certified to give expert advice in this area. My suggestion, though, would be to maximize whatever tax-advantaged options you have at your disposal. If you’re one of the very fortunate ones who can invest in both a TFSA and an RRSP, then I would advise you to do so. Anything that saves you from paying more than your legally-required amount of taxes is a great tool and you should be taking advantage of any and all such tools.

Every December, I plot out my financial goals for the upcoming year. Due some shrewd moves in my younger years, I’m debt-free and able to live comfortably below my means. I’ve managed to contribute to my TFSA every year by allocating a portion of each paycheque towards the goal of maximizing my TFSA contribution room. Life without debt allows for such luxuries.

If you’re like me, then you’ve already sat down with your budget to find out where the extra $500 is going to come from next year. (For my part, I’ve promised myself to bring snacks to the office each week.) As a Singleton, I spend a lot of money on eating out with friends because sharing meals is a huge part of my social life. However, I do have a home with a functioning kitchen, many cookbooks at my disposal, and a fairly good arsenal of baking tools. I’m more than capable of baking my own muffins for my daily snack, thereby replacing purchased goods with my own homemade ones. Bringing my own snacks means that I’ll eat better, still visit with my friends at lunchtime, and I’ll have money to put into my TFSA. It’s a trifecta of benefits!

The other beauty of the TFSA is that you get to decide what you want to save for. A super-duper annual vacation? Your next car? Retirement? Starting your own business? Down payment on a house? Rental property? A significant birthday celebration? A long-term sabbatical? Plastic surgery? Golf camp? Family reunion?

I’ve never heard anyone say that they’ve regretted earning money on a tax-free basis, nor have I ever heard them complain of having too much cash available to pursue their personal goals.

The TFSA is a wonderful tool for saving money. Your money grows tax free, no matter whether your money grows through interest, dividends, or capital gains. You can invest your funds in a wide variety of options – GICs, stocks, bonds, mutual funds, exchange-traded funds, real estate investment trusts! Since the money is growing tax free, you should strive to maximize your returns without making super-risky moves or investing in a ponzi scheme.

Despite its name, the money does not have to sit in a savings account at the bank. It should’ve been named the “Tax Free Investment Account” to plant the seed in the people’s mind that this account is best used for investing. Savings accounts are currently paying far less in interest than the inflation rate, which means that your money is losing its purchasing power if its sitting in a savings account instead of being invested in things that earn more than the inflation rate.

Even if you can’t contribute the full $6000 in 2019, you will continue to accrue contribution room each year. Put whatever you can into your TFSA – give until it hurts! Continue to build your emergency fund and to pay down your debts. Once your emergency fund is fully-padded and those pesky non-mortgage debts are gone, you can re-direct your money to your TFSA until you’ve maxed out your contribution room.

Mortgage Debt vs. TFSA

I’m a huge proponent of the Tax Free Savings Account (“TFSA”) and encourage everyone I know to stuff their TFSAs to the max. The beauty of this product is that money grows tax-free and you won’t owe any taxes on the growth of the money when you eventually withdraw it. You can fill it with the same investments that go into an Registered Retirement Savings Plan (“RRSP”) or a non-tax advantaged investment plan. This means you can put individual stocks in your TFSA. You’re free to stuff your TFSA with bonds, index funds, mutual funds, exchange traded funds (“ETFs”), guaranteed investment certificates (“GICs”) – any investment product your little heart desires!

At the same time, I’m a huge proponent of getting out of debt as fast as possible. I consider debt to be a cancer to your financial security. Instead of all your money working for you, some of your money has to go to someone else – your creditors – in order to make them rich or, atleast, financially secure. Debt sucks! You should get rid of it as soon as you can. Be it credit card, student loan, car loan, personal loan, line of credit – it doesn’t matter. Get debt out of your life and start keeping all of your money for your own dreams, goals, and priorities.

One day as I was encouraging a very dear friend to make use of her TFSA, she asked me point-blank whether contributing to a TFSA was the right move given that she and her husband – who also has an empty TFSA – were working on paying down their mortgage. “Is it better for us to pay off the mortgage or contribute to our TFSAs?” she asked me.

I was stumped! My two most basic financial tenets were at odds with each other, and I had no easy answer. But I’ve been thinking about her question for a long time… Here’s what I’ve come up with.

Once their mortgage is gone in roughly another 10 years, they can use their former mortgage payments to contribute to their TFSAs. They should be able to maximize investments in their TFSAs within a few years of paying off their mortgage because they are making significant mortgage payments currently. Mortgage-size contributions to their respective TFSAs will ensure that their available contribution room will be filled up very fast.

Secondly, the interest rate on their mortgage payment is fixed so they know how much their debt is costing them.

Thirdly, they’ll have to renew their mortgage atleast two more times before it’s gone and rates on mortgages are going up. By making extra payments to their mortgage principal balance right now, when their mortgage rate is low, they’re quickly eliminating the principal loan on their mortgage and minimizing the overall interest that they’re paying on that debt. They are also ensuring that their mortgage balance is as small as possible each time they renew at a higher rate. This diminishes the likelihood of facing higher minimum mortgage payments each time they renew their mortgage.

Fourthly, they both have pensions through their employers. Unless those pensions are reduced, my friends will have a steady income in retirement and may not need the added cushion provided by a big, fat TFSA. Stock market investing can be a roller-coaster and there is psychological value in sleeping well at night without worrying about money invested in the market. Paying down a mortgage delivers peace of mind since you know that you’re getting out of debt.

On the other hand…

The sooner money is invested in the stock market under the TFSA umbrella, the sooner they start benefitting from long-term investment returns that will more than likely be higher than the rate they are paying on their mortgage. The trade-off would be that it would take them more than 10 years to pay off their mortgage debt because the extra mortgage payments would be re-directed to investing within their TFSA. Keep in mind that there is no guarantee that the stock market’s returns will be higher – it’s a probability based on a review of returns in the past. As always, past performance is no guarantee of future returns.

Secondly, money that goes towards mortgage repayment cannot be accessed without taking out a home-equity line of credit or by selling the house. It’s essentially gone to the bank to repay the mortgage debt. Unless you’re willing to sell your home, you can’t get the money out of your house without borrowing it back from the bank. Money that is invested in the TFSA is far more accessible. You simply sell your investments and get the cash. I am not recommending that this be done – I’m just highlighting all the options.

Thirdly, investing with a TFSA increases the likelihood of a very comfortable retirement. My friends would still have access to their pensions. However, they might also benefit from having that big, fat TFSA that I mentioned earlier. It could be used for the little luxuries not covered by their pensions, whatever those may be. It could be used to help pay for their children’s university tuition or weddings.

Fourthly, my friends are in their late 30s and early 40s. Investing in the stock market now means a longer time horizon for systemic investing from their paycheques before retiring in their 60’s. Having their mortgage paid off in their 50s means that they’ll have maybe 10-15 of investing, rather than 20-25 years.

So at the end of the day, what do I tell my friend? Is it better to invest in the TFSA and anticipate higher returns over the long term, or is it better to make extra payments towards the mortgage and get rid of the debt as fast as possible?

Honestly, the decision comes down to my friend’s priorities. What is most important to her?

I can attest that a life without debt is fabulous! I was fortunate enough to pay off all my debt by age 34. I could have kept my mortgage until it ran its course, but I made a different choice for a few reasons. One, I really, really, really hate debt. Two, I knew that starting to invest in my mid-30s was a very good option to pursue in order to achieve my goal of a comfortable early retirement. Again, I was only 34 so I still had decades of investment runway ahead of me. Three, I didn’t understand the long-term returns of the market so I wasn’t in a position to make an informed decision about whether to risk my money by investing in the stock market. Looking back now, I’m fairly certain that my net worth would probably be significantly higher today if I’d invested in the stock market instead of paying off my house. I don’t regret my decision too, too much because I will still be fine and I have a mortgage-free home which will give me options when I need them.

If I could go back with the knowledge that I have now, I think a different choice would have been made. Based on what I’ve learned over the past 10 years, having money set aside in a portfolio while having a mortgage debt is the slightly better option. Why do I feel this way? I realize now that if I lost my home, then I would still have the money. When all of the money goes into the mortgage and the home is lost, then everything is lost – no home and no money! This is the worst of both worlds. Having the cushion of money allows for more options.

In my case, I was able to pay off my home at age 34 and then use gazelle-like focus to build my investment portfolio. If something had gone wrong before I’d built up my portfolio, then I would not have had sufficient money to keep my life intact while I dealt with whatever had to be addressed. If I had kept my mortgage over the last ten years, I would more than likely have benefited from the huge stock market run up that’s occurred since 2009. Those gains would have outstripped the mortgage interest that would have been owed.

They say that hindsight is 20/20 – they’re right. What do you think? Would you rather invest and stay in debt longer, or get out of debt first and then start investing for the future?