Perhaps the federal government’s greatest gift to those who aspire to financial independence is the TFSA, or Tax Free Savings Account, introduced in 2009. With $25,500 cumulative contribution room rising to $31,000 as of January 2014, TFSAs have now attracted a significant amount of capital. Consider that between them, couples will soon have $62,000 available that will be largely free from the clutches of the tax person.
In the early days, the mere $5,000 that was available initially seemed so insubstantial that many tended to give the vehicle short shrift. Certainly, many baby boomers felt TFSAs were too little and too late for their purposes, although they would look with a certain amount of envy at millennials and young investors with a 40-year investing time horizon ahead of them—indeed, many financial gurus have calculated that merely by maxing out TFSA contributions over such a time frame, that alone would be sufficient to ensure a comfortable retirement: no RRSP or employer pension plan contributions necessary! (We would of course advocate doing all of those things, since saving too much is a far better problem to have than saving too little.)
Also consider that many boomers are working longer than they had once envisaged and there may be a belated recognition that even some tax savings are better than no tax savings at all. Plus, consider that even once they do hang up their skates, TFSAs will still be available well into their 70s, 80s and beyond. If nothing else, retirees should be gradually converting non-registered savings and the after-tax proceeds of RRIF withdrawals into their TFSAs as more contribution room becomes available. And remember, because of inflation adjustments, the annual amount will gradually rise: it’s already moved from the original $5,000 per annum to $5,500.
Introducing MoneySense’s The Great TFSA Race
Long-time contributor Julie Cazzin—who has been with us since the magazine’s debut in the summer of 1999—is looking for readers with big TFSAs that she can profile in an upcoming issue of the magazine. We know there are people out there with TFSAs that have already grown to $60,000 or more and in some cases, beyond $100,000.
Sadly, this does not include yours truly. I’ve had a few big winners in social media stocks but they’re all in taxable accounts. The dilemma about asset location is that TFSA space is precious and the stocks (for it’s inevitably stocks that can generate the kind of growth likely to confer bragging rights on your TFSA) that have potential to become five- or 10-baggers are also the very ones that could be cut in half and convert a $30,000 TFSA overnight into a $15,000 TFSA. Hindsight is 20/20 but unfortunately the government does not let us retroactively rearrange things so our big winners end up tax-sheltered and the losers wind up as tax loss-selling candidates in non-registered accounts.