Boss Blog: March 22, 2017
Stephen Harper’s Greatest Victory – A Must Read on TFSA’s
Anyone who knows me knows that I am fairly political. Right or wrong I just can’t help it. The news of the day always fascinates me. I get caught up in the campaigning and speeches and all that stuff. That being said I do realize there are some things about politics that turn people off. It can be dirty and it definitely can be ugly. American election 2016……Despite this, I do get very excited when I see politicians doing good things, even ones I didn’t vote for. One such accomplishment was done by our former Minister of Finance Jim Flaherty who served under Prime Minister Stephen Harper. On January 2nd, 2009 the Tax-Free Savings Account came into effect. I firmly believe that this account is the greatest thing our government has done for its citizens in many years. In this post, I will go over why I believe every Canadian should have one of these accounts.
1) You can invest this money in anything you want
Taking advantage of compound interest is key to any person trying to invest. What that means is setting it and forgetting it. The money you put into your TFSA can be invested in stocks, bonds, mutual funds, index funds, etc. The route you chose should be based on your risk tolerance (how adverse to loss) and time horizon (when you plan on using the money). Like any investment, there is a possibility of loss but that can be mitigated by creating a diverse portfolio of funds. In simple terms, don’t invest it all in one or a few stocks. I would recommend choosing several funds that span several different regions and sectors. Never put all your eggs in one basket and watch it grow!
2) The TFSA can replace the RRSP for today’s generation
The TFSA and the registered retirement savings plan (RRSP) are both what is known as registered products. All that means is that certain tax implications apply to them. For those in lower income brackets, the immediate tax deductions associated with an RRSP may not be as relevant to them. With the TFSA you do not receive tax deductions but for those with long time horizons, it may not matter. Here is an example for you. If a 20-year-old contributed the maximum every year ($5,500 yearly) to his/her TFSA for 45 years, (to age 65), he/she would have $922,268.40!! (That is at 5% interest, which is achievable over time). That is almost a million dollars in savings that could be used towards retirement or anything else. If that person makes only 30K a year the maximum contribution room for the RRSP and TFSA are about the same. Why not put your money in a vehicle that won’t tax you when you withdraw the money. Jim Flaherty said an RRSP is for retirement and a TFSA is for everything else. I think the TFSA can and will become the new method of retirement saving for this generation. That leads me to my next point:
3) It’s in the name…….TAX FREE
I have several clients that are nearing retirement time and one major concern of theirs is the tax bill once they stop working. With the RRSP you do get immediate tax savings but then the tax is deferred till you withdrawal. The positive is that by that time you are usually in a much lower tax bracket, so there is a benefit. The problem is you do still have to pay tax on withdrawals. With the TFSA that is not an issue. Money in and money out is never taxed. As long as you don’t go over your contribution limits you will never pay taxes or a penalty. It truly is the government’s greatest gift to us. When you think about it what did they really do when they created the TFSA? The answer is nothing! All they did was stay out of our way! They allowed us to make our money grow without their hands all over it. That’s good government to me! Even at lower tax brackets, you can still see 20% of your money disappear to taxes. With the TFSA that is never the case. Genius!!
I practice what I preach. I have seen my TFSA grow over 15% during the past year. #trumpbump? Now that doesn’t mean that it’ll continue on that path. I am looking for long term growth so if it settles into a nice round 8% I will be very, very happy. I have several friends putting money in stocks and some do well, others not so much. They ask me: “What should I invest in?” I think a well-balanced TFSA is still the best option for anyone looking to invest. Regular contributions will make your funds grow during up and down markets. (Google “Dollar Cost Averaging”). Why put all your money on one or a few stocks. Might as well play roulette in my opinion. I have helped several people set up TFSA’s with small contributions. They barely even notice the money that is gone from their account. What they do notice is the savings and growth when they get their statement. You better believe I am going to get them to step it up a notch in their savings plan come next year. I think it should be everyone’s goal to max this puppy out every year. The rewards are huge and finally an investment with no downside.
Years~TFSA Annual Limit~Cumulative Total
2009-2012~$5,000~$20,000
2013-2014~$5,500~$31,000
2015~$10,000~$41,000
2016-2017~$5,500~$52,000
To learn more about TFSA’s or to get started with your own savings plan contact me at joe@budgetboss.ca.
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Joseph James Francis is a Financial Advisor. You can find him on various social media platforms and at www.budgetboss.ca.