Columns like this often tell people to save. Normally, it would be my job to get down on my knees and do it. “Come on, start with $20 a week, you can do it!” It’s like trying to convince a teenager to clean their room. Or a Netflix couch potato to take up running.
I won’t, of course. You know that saving is another way of saying getting rich. And getting rich is another way of saying being free. I don’t think you need me to get on my knees and beg you to be free.
This gives us more time to talk about ways to improve our independence. One of the best ways is to use the tools that the government provides. One of those tools is the TFSA.
The Tax-Free Savings Account (TFSA) is like the government putting a Ferrari in front of your house. Many people realize it’s a Ferrari, and use it accordingly. But a majority think it’s a slightly rusty 1997 Honda Civic with a yellow rear spoiler, and decide to ignore it. Or take it to get milk from the convenience store through a gravel road full of holes.
A recent BMO survey showed that the average TFSA account balance in Canada is $41,510 in 2023.
This average is driven up by people who are approaching retirement or are retired: journalist Rob Carrick of Globe and Mail had calculated that the average TFSA balance for 35-39 year-olds was just over $15,000 in 2022.
That’s not a lot, considering that 35- to 39-year-olds were adults in 2009 when the TFSA was launched, and their accumulated contribution space as of 2022 was $81,500 (it’s $95,000 today).
But what’s even more shocking is that only 53% of people with TFSAs hold investments in their account. The remaining 47% hold cash and “may be missing out on opportunities for increased tax-sheltered growth,” as BMO puts it.
In a nutshell: 47% of TFSA holders take their Ferrari on a gravel road that will definitely damage the expensive suspension.
In short, it’s a waste of a unique tool.
The TFSA is the first registered account I’ve maxed out since becoming a Canadian resident again in 2013 after several years in the US. I’ve never withdrawn money from my TFSA, and I don’t see the day I will (although I will one day).
The advantage of the TFSA is that the growth of the investments you put into it is tax-free. If you buy a fund for $100 and sell it for $200 in ten years, your $100 profit will never be taxed. It comes back to you in full.
And you don’t need to have huge sums of money to invest to benefit from it.
A 20-year-old putting $15 a day into their TFSA, investing it at a 6% return, would end up with nearly $76,000 by age 30, $213,000 by age 40, $459,000 by age 50, $900,000 by age 60, and $1.2 million by age 65.
Amounts that are invisible to the eyes of Quebec and Ottawa.
When I mention these types of examples, many readers say to me: “Yes, but the 20-year-old will not let his money grow throughout his life, because he will have expenses, like buying a house!”
To which I respond: of course this person is going to have expenses. But they are also going to want to save and invest much more than a mere $15 a day. Investing $15 a day is the equivalent of riding a bike with training wheels. It is a beginning, not an end in itself.
All this to say that the sums placed in the TFSA have an advantage in remaining there for a long time. Ideally for decades.
It is often thought that the RRSP is for retirement, and that the TFSA is for meeting short-term needs. Personally, I am not so categorical.
Of course, the RRSP is important. But the TFSA is also a formidable weapon in the very long term. For fun, you can play with the CELIAPP, TFSA and RRSP comparison tool on the Finances Go website1.
Since withdrawals from the TFSA are not added to our income for the current year, they do not reduce old age assistance from Quebec and Ottawa.
Theoretically, a person who lived solely on their TFSA in retirement would have zero income in the eyes of governments, which would then come to their aid with increased financial aid.
Many people think of the TFSA as a chequing account that you can dip into to go on a trip to Mexico or upgrade your washing machine. That’s probably why Canadians leave so much cash in it.
But cash doesn’t bear fruit. It doesn’t get any growth.
Putting an asset that has no growth in a shelter designed to protect growth is illogical.
I’m not saying to never dip into your TFSA. The TFSA can help us pay for an unexpected expense. The investments in it can reduce our stress, and help us in the event of an event such as a job loss.
But let’s not forget that it is in the very long term that our TFSA deploys its fantastic powers.
Question of the week: What do you put in your TFSA?
1. Visit the Finances Go website