Karen Hudson, 41, of Whitby, Ont., started investing in TFSAs early. “I opened an account for myself and my husband, Steve, the day after they came out. I was really excited. If there’s any way I can avoid taxes, sign me up.”
The Hudsons aren’t sophisticated investors, so they were just looking for a simple strategy with their TFSAs. In the beginning, their money was divided evenly between an ING Direct high interest savings account that paid about 1.5% in interest and the ING Direct Streetwise Balanced Fund. This index mutual fund has a low management expense ratio (MER) of 1.07% and invests in 60% equities and 40% bonds. The couple currently has about $10,000 invested in TFSAs. “We’re a little behind in our contributions because I was on maternity leave last year, but we’re back on track now,” says Karen.
Last year, seeking better returns, Karen opened a TFSA with TD Waterhouse and began moving money from both her and her husband’s ING Direct accounts into the TD Dividend Growth Fund. It has a two-year annual return of 7% with an MER of 2.03%. “I will continue slowly moving everything into the dividend fund,” she says. “I’m getting a better bang for my buck there. I’m just sorry I don’t have more money to put into the account. Our RRSPs and the RESPs for our two sons have been the focus of our investing, so we often don’t have enough to top up our TFSAs. But as long as the amounts in these accounts are increasing, I consider it progress.”
What the experts say
Both experts agree that right now the Hudsons should focus more on their RRSPs than their TFSAs, since both are in a high tax bracket. RRSPs generate tax refunds at your marginal tax rate, so people with an income over $83,088 will get a 43% tax refund. Registered Education Savings Plans (RESPs) are a good priority, too, since you get a government grant of up to $500 per year (the government matches 20% of your first $2,500 in annual contributions), more if you have a lower income. “So it’s not the end of the world if someone hasn’t maxed out their TFSA because they’ve got other, potentially better investment opportunities available,” says Heath.
Lamontagne agrees. “The problem is they still have some questions on how best to optimize their limited savings.” He feels the couple would benefit from sitting down with a financial planner to help them prioritize their RRSPs, RESPs and TFSAs.
As for Karen’s strategy of moving her TFSA from a savings account to the TD Dividend Growth Fund, Lamontagne says the key is considering the goal of the funds in the TFSA. “For some people a TFSA may just be a substitute for a bank account,” says Lamontagne. “But in this case, if she has no immediate need for the TFSA funds, then moving her money out of straight savings into something that could potentially earn more in the long term was a good move.”