TFSA - Millionaire on the Prairie

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.

I got my first part-time job in grade 11. Every two weeks, roughly $137 was plopped into my bank account via electronic deposit. And every two weeks, I would go to the bank machine and manually transfer $50 from my chequing account to my savings account without fail. It was simple and easy.

When I got older, I learned about automatic money transfers that can be set up once and left to run indefinitely. My money would be transferred on the schedule I set and in the amount I wanted so that I could meet whatever specific goal I chose. I set up an automatic money transfer as fast as I could!

When I started my first, real grown-up job with my own office and everything, I opened up several bank accounts and designated them for various goals: travel, utilities, insurance, property taxes, charitable donations, Christmas gifts, RRSP/TFSA contributions, home renovations, etc. Every two weeks, the following process took place: my paycheque hit my bank account, my automatic transfers went into action, and the money leftover could be spent on whatever I wanted for the next 2 weeks.

Thanks to automatic transfers, I’ve fully funded my registered retirement savings plan (RRSP) every year. When the tax free savings account (TFSA) was created in 2009, I was able to fully fund that account as well. My automatic transfers mean that I always take a vacation every year, in addition to short road-trips. Automatic transfers mean that I don’t have to scramble to find money to pay for my annual home and vehicle insurance premiums, nor do I panic when it’s time to pay for my annual property taxes. When it is time for me to buy my next vehicle, I will have the funds in place to simply pay cash because I have an automatic transfer in place to set aside money to replace my current vehicle.

When one goal is fully funded, the automatic transfer stays in place. I don’t suddenly add those funds back to my day-to-day spending to be frittered away on things that won’t last. Nope! Instead, those monies continue to accumulate for the next priority of my list. Next year’s annual insurance premiums are paid off? Great! The monies can now go towards hitting the RRSP goal a bit sooner. Oh? I’ve already met my RRSP goal for next year? Then the monies go towards the TFSA! Really, that goal is funded too? Then it’s time to seriously start planning that vacation…

You see what I mean? Having the automatic transfer in place means that I’ve made the conscious choice to take some of my today money and to turn it into tomorrow money. Part of my paycheque is allotted to deferred gratification so that I can meet my future goals and satisfy my priorities. The leftover money is to be used for immediate guilt-free gratification. I don’t need to worry that I’m spending too much on an item today because I already know that my future expenses are being paid. When the time comes to pay for the non-sexy elements of life (did I mention car insurance?), the money will already be in place for me.

Automatic transfers are one of the best tools available for meeting financial goals. Once you’ve determined the priorities for your money, automatic transfers ensure that those priorities are met. I can’t think of a single better method for ensuring that money is set aside to meet your goals.

Even if you’re in debt, you can use automatic transfers to meet your goals. Simply set up a recurring payment to a particular debt so that the debt is paid down every single time you get a paycheque. The benefits of this are two-fold. First, you’re meeting your priority of getting out of debt. Second, you’re paying the least amount of interest on your debt because you are ensuring that the principal is being paid down as fast as possible which minimizes the time period over which the interest can compound.

As an example, if you have a credit card balance then you need to get rid of it. The credit card company will tell you that you only need to pay a minimum amount every month and the balance can ride until next month. For the privilege of paying less than the full amount you owe, the bank will charge you interest on the outstanding balance. It’s a recipe for riches for the bank. It’s a recipe for disaster for you.

So here’s what you do to avoid disaster. You STOP using your credit card. You go to your online bank account. You add your credit card as an online payee. You set up an automatic transfer of atleast $100 to your credit card that matches your paycheque schedule. This system means that your credit card balance is paid down on a steady schedule, at an amount that is (hopefully!) higher than your monthly minimum payment. You do this until the credit card balance is paid in full.

Make sure that automatic transfers are working in your favour, not your creditors’ favour. It astonishes me that people are so willing to give their money away when they work so hard for it. Trust me – it only takes a little bit of patience to keep it for yourself!!!

Tag: TFSA

Tax Free Savings Account – the Gift that Keeps on Giving

Whatever should you do with that extra money?

Every little bit helps!

Blue Lobster, how do you use your TFSA?

Automation is beautiful!