We’re using TFSAs, just not wisely

Nearly half of Canadians have a TFSA, but few are housing top earning investments inside the tax-sheltered account.



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Close-up of piggy bank in shopping trolleyNearly half of Canadians (48%) have a Tax Free Savings Account (TFSA), up 23% from this time last year, according to a BMO report published Thursday. The adoption rate is certainly encouraging. Unfortunately, the study also found the majority of TSFA holders don’t understand the specifics of how the TFSA works; as a result most aren’t harnessing its true power.

Just 11% of Canadians who responded to the poll (conducted by Pollara for BMO) correctly identified all six eligible TFSA investments. And only 19% know the annual contribution limit is now $5,500, up from $5,000 in 2012. Less than half (47%) know how much you are allowed to re-contribute after making a withdrawal.

Saving is good, but saving efficiently is better

Do any of these nitty-gritty details matter? Isn’t the important thing that Canadians are saving? Well, yes and yes. You see, understanding the rules can make a huge difference in how fast your annual contribution grows. It can mean the difference between a $30,000 TFSA account and a $50,000, $60,000 or even a $300,000 TFSA account. Don’t believe me? Just read The Great TFSA Race from the December/January issue of MoneySense. Julie Cazzin profiled seven investors who are putting their TFSA to work using a number of different investment strategies: some risky, others pretty vanilla. What they all have in common is an in-depth understanding of the TFSA rules, specifically as they relate to investment options. To be clear, you can hold mutual funds, stocks and ETFs inside your TFSA, as well as fixed income. The former have higher yield potential than cash or GICs,  yet so few Canadians are holding them in their TFSAs where they can grow tax-free. I repeat, tax-free. The BMO study found cash is the most common component  held in TFSAs (57%), followed by mutual funds (25%) and GICs (23%), stocks (14%) and ETFs (5%).

Contribution confusion

Confusion surrounds annual TFSA contribution limits as well. The federal government raised the annual contribution limit to $5,500 as of last year. For prior years dating back to 2009, when the first TFSA contributions were possible, contributions were capped at $5,000 per year. Over-contributions result in 1% tax on the amount in excess of the limit. But it’s not over-contributions that’s plaguing most Canadians, I would wager. The BMO report found only one in 10 TFSA holders have over-contributed since opening an account over the past five years. My guess is that under-contribution is a bigger problem among Canadians with means. That’s because the TFSA allows you to withdraw funds at any time and—here’s the kicker—you gain back contribution room equal to your withdrawal the next calendar year in addition to the new annual allowance. Let me explain. All eligible Canadians have accumulated a total contribution room of $25,500 by now, including $5,500 for this 2013 calendar year. Let’s say you are one of the lucky few who have managed to max out your contributions every year and you withdrew all that money today, all $25,500 of it. You could in theory put it all back in January, plus the $5,500 of free space that opens up in 2014 for a total of $31,000. Most of us don’t have that kind of money just lying around to invest using a TFSA but the concept is no less important with a smaller amount, especially if some of your money is sitting in non-sheltered accounts where you’re paying tax on the gains.

So this December, do a quick survey of your portfolio to see whether you have any money in non-registered accounts. Calculate how much unused contribution room you have and will have as of January. Then, shortly after New Year’s move as much money as you can from non-registered accounts into the TFSA and invest it in your choice of mutual funds, GICs, stocks and/or ETFs. Then watch your money grow faster, tax-free. Remember, you can take it out anytime without penalty and put it back in 2015.

Need help calculating your total contribution room? You can determine your TFSA contribution room by going through one the following government services My AccountQuick AccessTax Information Phone Service (TIPS) or by using this spreadsheet. The process isn’t easy but it’s worthwhile, especially if you have TFSA assets with more than one financial institution.

The Great TFSA Race gave me the nudge I needed to move my dividend-paying stocks inside the TFSA. Now it’s your turn. TFSA holders plan to contribute an average of $3,625 this year, according to BMO. You work hard for your money. Might as well make it work hard for you.

7 comments on “We’re using TFSAs, just not wisely

  1. Yep, topping up our TFSA and RRSP accounts on Thursday – to the max – just received money from Dad’s estate and I am NOT squandering it. I have been out of the workforce doing elder care for the last 6 years, and this money will replace what we would have been putting in when I should have been working but wasn’t able to. Feels good to get the savings back in place and also know that I am being respectful of my parents and the effort they made to leave me an inheritance. Thanks Mom and Dad! We miss you!


  2. Hi Stefania, I moved to Montreal this year. I am a resident Permanent. Where I can found more information about TFSA? I would like to know how much I is my contribution room. Thanks


  3. Stefania, I’m new to the investment world, but I think I grasp the concepts. I’m considering opening a TFSA and buying mutual funds through it. Am I understanding the basic concept? Thanks!


  4. My wife and I are both 43 and have topped up all our TFSA’s since 2009, we currently have investments worth $68,277 in our TFSA’s. We have 2 adult twin boys are both 18 years old.

    We have been teaching them about taxes, investing, tax free and tax deferral, saving etc. for the last year or so and we are going to work together as a family to maximize TFSA’s in a conservative way.

    We buy longer term provincial zero coupon bonds in our TFSA’s and we so far averaged about 3.85% over the last 6 years or so. Basically, with them working in the future and us helping them now, we will contribute $22,000 for four of us and try to keep up with a 3.85% rate or higher as interest rates should normalize over the next few years.

    Our $68,277 in current TFSA’s plus $5,500*4=$22,000 as a family compounding at 3.85% TFSA’s will have in 25 years, $1,108,053. This will grow to $2,405,215 in 15 more years, 40 years total.

    We have no more mortgage or any debts of any type and we are also putting the maximum in our RRSP’s every year which our RRSp’s currently are worth $111,000. As we continue to put $15,500 a year in our RRSp’s earning 3.85% conservatively as well with the same type of investments, we will have $942,401 by the time we are retied at 67 years old.

    Our annual RRSP income tax refunds of about $5,200 a year is invested in a non-registered account containing dividend ETF’s yielding about 4.10 % right now and we are reinvesting all dividends.

    This would be worth about $228,488 when we retire at 67 and collect our C.P.P and OAS which we estimate to be around $4,700 a month.

    We have $23,000 and $34,000 in RESP’s for our boys as we were fortunate enough with all 4 of our parents chipping in $10,000 combined. We do currently have a home worth $345,000 here in Eastern Toronto. We have a $32,000 reserve fund in GIC’s, savings accounts as well plus a small $100,000 life insurance policy for each of us.

    Just start saving and planning with whatever you got and don’t get discouraged. You can’t imagine how much you can save and invest and essentially have in 10, 20, 30 years plus for the whole family.


    • I agree with you Ron Wallick, this is a sound financial strategy working together as a family stretching and multiplying TFSA’s and the compound interest and growth over decades.

      RRSP’s and RESP’s are very beneficial too for tax savings and tax deferral and family income splitting. I think that Canadians should use the same approach for debt reduction and staying out of debt.

      I got married 5 years ago and we have $65,000 in RRSP’s and $70,000 in TFSA’s because we did not buy too much house for my family, my wife, my son and me too.

      We have no car loans, student loans, credit card debt etc. and used the $21,700 from RRSP income tax refunds by maximizing our RRSP to contribute to TFSA’s. We would have $24,600 less in TFSA’s if we did not do this.


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