First financial act of 2015: TFSA contribution

Make your money work as hard as possible by topping up early

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Save_PoA_484Your first financial act of 2015 ought to be contributing as much as $5,500 to your TFSA (Tax Free Savings Account) if you’re Canadian. Launched at this time in 2009 and behaving somewhat like America’s “Roth” IRAs, it’s hard to believe this is already the seventh time you can contribute. By my calculations, that means $36,500 of collective contribution room plus any investment growth. That’s four years at $5,000 and now three years at $5,500: the maximum was boosted by $500 as an inflation adjustment for calendar 2013.

So if you’re one half of a couple, that means $73,000 in joint contribution room, even if you left it in interest-bearing investments paying almost zero. If you’ve been investing mostly in equities (either stocks or equity ETFs), it’s likely your TFSA had reached $40,000 or more by year-end, so it’s quite conceivable that some couples now have close to $100,000 invested in TFSAs between them.

Thursday, Jan. 1 was of course a holiday. While Friday, Jan. 2, 2015 is likely to be a quiet day for most, there’s no reason you can’t contribute the next $5,500 to your TFSA, particularly if you use online banking and/or discount brokerages.

Good place for equity ETFs

What to invest in? In retrospect, those who invested in US investments with unhedged exposure to the US dollar would have done best up till now. Our daughter’s TFSA is more than half invested in US tech stocks and broader ETFs and the exposure to the greenback has boosted her TFSA to several thousand more than our own TFSAs with more exposure to the loonie.

Generally, I think a Couch Potato approach to investing in TFSAs makes the most sense, using broadly based ETFs from firms like Vanguard or iShares. Those closer to retirement may want a healthy exposure to Canadian dividends: foreign dividends will lose a bit of withheld tax in a TFSA and are better held in RRSPs for that reason. But for younger investors it may make sense to hold non-dividend paying US tech stocks in a TFSA for both the extra growth potential and the exposure to a strong US dollar that is showing no signs of weakening.

I still say the TFSA and Roths are the best games in an over-taxed town. While it’s true that many had hoped the 2015 limit would be more than $5,500, remember that unlike RRSPs, you can continue to contribute to TFSAs well past age 70 or 71: in fact, if you live that long you could still be contributing if you’re a hundred or more.

The key is to get the money in there as soon as you can and let it grow. And that means early January each and every year. While I think the benefit is particularly powerful for the young, they should balance the growth potential with debt repayment. There’s not much point in paying close to 20% a year in credit card interest if you’re only earning 2% interest in a GIC or cash equivalent contained in a TFSA.

Jonathan Chevreau is editor-at-large for MoneySense and recently launched the Financial Independence Hub. He can be reached at jonathan@findependenceday.com.

8 comments on “First financial act of 2015: TFSA contribution

  1. A question.Would it be a good idea to borrow the money to contribute to a TFSA?

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    • Good question. I would suggest you should not borrow to invest in your TFSA because you won’t be able to write off any potential losses you incur. Check with your tax professional to verify.

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    • My recommendation would be, yes, do borrow to fill up your TFSA room so long as you can make the payments with relative ease. The interest incurred on the loan is tax deductible so in most cases it makes good sense. Ref: Income Tax Act S. 20(1)(c)

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  2. sorry Mr. Lloyd Daye, i hope you read the whole article in the first place. If your borrowing money, in which you will pay interest to pay back. Most likely to be more then 2%. There’s no Point when your only getting 2% back your going no where with this other then wakling backwards.

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    • common sense: If you can’t generate more than a 2% return I would suggest either hiring a professional or firing the one you have. As well, you can deduct interest on an investment loan. Hardly walking backwards.

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      • @Mitch: Can you explain how you are going to write off the interest on a loan for the TFSA. My current understanding is that interest may only be written off on investments with a reasonable expectation to earn income. Since you do not pay tax on gains in a TFSA (capital or income), any investment will not be able to earn investment income as defined by the CRA.

        In fact, it says the following directly on the CRA website:

        You cannot claim on line 221 any of the following amounts:

        the interest you paid on money you borrowed to contribute to a registered retirement savings plan, a pooled registered pension plan, a specified pension plan, a registered education savings plan, a registered disability savings plan, or a tax-free savings account (TFSA);

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  3. I am a regular reader of MS .And Canadian Citizen of 7 years. I am in Canada for 12 years.Throughout, most of the qualified and ready to work from various countries are dumped into General Labour jobs that pay now $11.25. I request MS to explore ways and means to contribute at least $5500 in TFSA.Thanks

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    • I am a Canadian Citizen born and raised. I too am well qualified but due to lack of work available I work as in General Labour job. Although I only make $11.25, I save what I can and contribute as much as I can in TFSA. Thank you Money Sense for your guidance!

      Reply

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