While the TFSA accounts are very popular that does not mean that they are being embraced or used to the fullest. This week Rob Carrick of the Globe and Mail penned TFSA’s have been a disappointment in getting Canadians to save more.
Rob references a recent study published in the Canadian Tax Journal that looked at figures from tax filers between 2009 and 2015. What is surprising is that only 2-3% of tax filers are making the maximum TFSA contribution. But perhaps we should not be surprised. After all of life’s spending needs and the high taxes that Canadians face, there’s just not that much left at the end of the day, or make that end of the month.
Very few Canadians are in that fortunate position where they can max out their RRSP and TFSA contributions and then move on to non registered saving and investing. Most struggle to save even a modest amount. That said, and all complaining and excuses aside, I do believe that most Canadians could find more monies to save and invest. Here’s one of my favourite posts Oh Look, I just Found $888,000 In Your Coffee.
And one of the main observations from that study is that TFSA contributions are displacing RRSP contributions. Canadians might be enticed to save a little more, but they’re saving less for retirement. TFSA dollars are less ‘sticky’ compared to RRSP dollars and the TFSA monies are used often for more short term savings goals and that all-important emergency fund.
It’s just so much easier to access TFSA accounts with the press of a button on your laptop. It’s more difficult to access RRSP monies and we face those withholding taxes if we want to remove those monies for spending. We treat RRSP monies with much greater respect.
That said, for many, the TFSA can be a much better choice for retirement investments. Here’s a wonderful post on RRSP vs TFSA on savvynewcanadians.com. And for many, the ideal strategy will include a mix of RRSP and TFSA accounts given the lower contribution levels of the TFSA program.
In that Globe and Mail piece Rob also pointed to the fact that if more Canadians embrace TFSA over RRSP accounts that will impact government revenues. Of course Tax Free Savings Accounts are true to their name (for now) as we are not taxed on the investment gains and we are not taxed on those monies when we take them out for spending. When I was an advisor at Tangerine it was not uncommon to see clients with TFSA accounts approaching $100,000. I’d guess many Tangerine clients who are invested in the portfolios now have passed that $100k threshold with 2019 contributions and recent market gains.
The Tangerine client is a little more affluent than the ‘average’ Canadian saver.
As Rob Carrick had hinted in the article, and I am in agreement, the tax man will come looking for those dollars if TFSA-for-retirement becomes too big of a tax drain.
Tax me I’m Canadian.
That will not be fair as we are already taxed on monies that are available for TFSA accounts, but that might be the reality in Canada. It’s my guess that it will simply be means-tested and the CRA will go after more affluent Canadians who might eventually have $300,000 or $400,000 in their TFSA accounts in addition to other savings and investments and pensions.
Poor folk like me might not have to worry. For many years I was able to max out our TFSA contributions, but lately with me developing a financial planning strategy of cutting my income in half or worse, those TFSA accounts have been going in the ‘other’ direction.
RESP GIC strategy on Weekend Reads.
Here’s a very well thought out piece on milliondollarjourney. This is a great blog that you should be following, of course. Please have a read of Using a GIC ladder for RESP withdrawals. The post makes the valid point that when our monies are shorter term we should keep ’em safe. A reasonable time horizon for a sensible lower risk Balanced Portfolio is 4-5 years. Given that, when a student enters school the time horizon might be 4 years if grad studies are not a consideration. It’s possible that a parent might roll the dice and keep some of the monies invested for year 4. But it’s likely sensible and prudent to have all of those RESP monies safe and secure for the full 4 years and the full term of the College or University studies.
What is interesting though is that post was a response to a reader question …
I have a question in regards to moving funds towards GIC’s. My son turns 17 later this month and his RESP portfolio has $70k. This month I would like to start moving funds into Money Market Fund and GICs. While Money Market is pretty straightforward, I am not exactly sure how to incorporate the GIC’s at this stage of the RESP journey. Can you please provide some advice on this? Thanks for the great posts!
And it appears that the reader got lucky in waiting until the ‘last minute’ to move those funds to safety. Depending on the risk level that $70k could have been reduced to $40k or $50k for example if we had experienced a major market correction. We haven’t had a major correction in many years. That’s just a lucky break.
As I had penned in this piece You should protect your assets long before your retirement date. You should also protect investment assets before the need to harvest RESP funds.
If an investor wants a managed RESP portfolio they might look to Canadian Robo Advisor Justwealth, the only robo with target-dated funds designed for RESP accounts.
Mark Seed of myownadvisor recently made the move to a condo from his house. There are some great tips and advice in Moving survival tips.
Robb Engen of Boomer and Echo recently used his Aeroplan miles to take him and his wife to Ireland for the trip of a lifetime. Robb shares his experience on how to use those points and the hidden fees and surprises. Here’s The easy way or the hard way.
On FindependenceHub Jonathan Chevreau looks at The best vehicles for an emergency fund. That post links to articles on debt management and the path to financial independence. You’ll get more than your money’s worth from that one post.
I also like this post from the Hub that features Bejamin Felix of PWL Capital. Retired Money: What to do about falling GIC rates. Ben argues for at least a mix of bonds and GICs for the fixed income component. I’d also add in that bonds offer that potential of an inverse relationship to stocks. They are better risk managers.
The Dividend Guy
And I really like this post from Mike, a look back on his first two years after leaving his full time job to run the Dividend Guy Blog and Dividend Stocks Rock. He writes on the dreams, the frustrations, the achievements. Mike is an inspiration, and a great help to Cut The Crap Investing.
Thanks for reading. Have a great weekend. Stay cool if you’re in Central or East Canada.