It’s safe to say that 2022 did not go according to plan. On a macro level we had stubbornly high inflation, rapidly rising interest rates, and falling stock and bond prices. Personally, we managed to execute our revenge travel plans with a week in Maui, three-and-a-half weeks in Italy, three-and-a-half weeks in the U.K, and eight nights in Paris. And, in the midst of all of this, we decided to build a new house.
I like to set financial goals before the start of each year so we can map out our spending and savings strategy and make sure we’re aligned with our longer-term vision. But plans can change and so it’s important to be flexible and course correct as needed.
At this time last year I fully intended tackle five goals:
- Finish catching up on my wife’s unused TFSA room ($37,500)
- Max out my annual TFSA room ($6,000)
- Invest excess profits in the corporate investing account (~$48,000)
- Max out RESP contributions ($5,000)
- Add an extra $6,500 into our travel budget
The year started off well enough. I contributed the $6,000 annual maximum to my TFSA and we added another $10,000 to my wife’s TFSA. We contributed $8,000 to our corporate investing account.
Then we went to visit a show home in a new community nearby our house. One thing led to another and we ended up signing a purchase agreement to buy a lot and build a new house.
Our course correction from there meant pausing contributions to my wife’s TFSA and in fact we ended up draining our TFSAs to use for the initial deposit and subsequent draw.
We also adjusted our expected contributions to the corporate investing account, from $48,000 down to $36,000, to build up a bigger cash reserve just in case.
Outside of that major change in plans, we managed to travel through most of April and July and still exceeded our business revenue expectations for the year. We also maxed out the kids’ RESP contributions for the year.
2023 Financial Goals
We don’t have a possession date for our new house yet but we’re targeting March 1st. We’ll also need to put our existing house up for sale (definitely not renting it out!) soon and try to thread the needle of selling it shortly after moving into our new house.
Whenever you’re going through a major life change, whether it’s buying a new house, going on parental leave, having a child, or even retiring, it’s okay to give yourself a grace period to adjust to your new situation. That might mean pausing automatic savings contributions for 3-6 months to make sure you’re still on solid financial footing.
On the other hand, as a planner I like dealing with certainty when it comes to my own finances. Unfortunately, we don’t have much certainty heading into 2023.
We don’t have a possession date. We don’t know when (or if) our existing house will sell, or for how much. We don’t know how much we’ll end up putting down on the new mortgage. We don’t know what the new interest rate will be on the new mortgage. We don’t know (exactly) how much we’ll end up spending on extras such as window coverings, landscaping, a new couch and TV, moving costs, and any “upgrades” over and above our housing allowances.
We also don’t know if we’ll travel next year. With the move and the extra expenses, it might be nice (and economical) to stay home for a year and enjoy our new surroundings.
Finally, we don’t know how much we’ll be able to save and invest next year.
With all of that in mind, here are our very simplified 2023 financial goals:
- Move into our new house
- Sell our existing house
- Set aside ~$50,000 from the house sale proceeds for window coverings, landscaping, and other “extras”
- New house is completely furnished, windows covered, yard landscaped in 2023. No “someday, maybes”
- Remaining proceeds from house sale go towards the new mortgage
- Max out RESP contributions ($5,000)
- Contribute $6,500 each to our TFSAs (late 2023)
- Invest excess profits in the corporate investing account (~$36,000)
- Maintain work-life balance – no increase in business revenue expectations
- Use accumulated travel points towards a one-week all-inclusive holiday somewhere sunny
Everything flows from the first two goals. We need to be in our new house and to sell our existing house before we can achieve any other personal goals. Everything else will remain on hold until we have certainty around the timing and financial implications of this move.
The past year has been unusual in a lot of ways. Next year will be much of the same until we settle into our new reality. For us, it’s the start of a new chapter in our lives.
We’ll get our feet under us again and make a plan for the next 10 years of our life. That will include paying down the new mortgage, filling up our TFSAs again, and building up our corporate investments. It will definitely include more travel.
A transition period like this is a great time to re-evaluate your annual financial goals and make sure they align with your long term vision. Know that it’s okay to pause your regular savings while you adjust to your new situation, or if you need to fund a one-time expense.
Assess the impact. What will the change mean for your long-term goals? You might need to work a year or two longer, or reduce your spending assumptions in retirement. Maybe it won’t impact your goals at all.
Readers: what are your financial goals for 2023? Any big changes from this year to next year?
We’re building a new home and should have possession of it sometime in February. I’ve been asked a few times if we are going to hang onto our existing home and rent it out. After I stop laughing I explain why I have no desire to own a rental property.
I admit that I have a preference for owning a small slice of nearly every publicly traded company in the world through a low cost, total market ETF. I’d never want to get my hands dirty working for any of those companies, but I’m happy to share in their profits over time.
The thought of being a landlord and having to worry about finding and managing tenants, dealing with general upkeep and maintenance, and holding a contingency fund for larger renovations or repairs is not at all appealing.
Being a financial planner, I also have many clients who do own rental properties, and while some are happy to own and manage multiple properties, others have shared their horror stories about bad tenants, expensive repairs, cash flow troubles, and the lack of price appreciation in areas of the country outside of Ontario and BC.
Still, I like to explore my options. The risk our house doesn’t sell in a reasonable time and for a price we’re willing to accept is not 0%. If the local housing market dries up, it might make sense to take down our listing and rent out the home, at least temporarily (for a year or two).
A property appraiser determined we could fetch about $2,800 per month for our house. That sounds pretty good on the surface, but a closer look at the numbers gives me pause.
Let’s assume we extract a good chunk of the existing home equity for a down payment on our new house. That leaves a mortgage of about $390,000. Paid over 25-year, the mortgage payment would be $2,284 at an interest rate of 5%. Property taxes and insurance add another $650 per month. That comes to $2,934 per month in expenses. Tenants would pay for their own utilities.
Even if we managed to get $3,000 per month, we’d only make about $800 for the entire year, which is not nearly enough of a contingency for maintenance or minor repairs (let alone if something major breaks).
A smaller mortgage of, say, $340,000 would bring the mortgage payment down to $2,000 and make the numbers more palatable. But that’s just robbing Peter to pay Paul, meaning the smaller the mortgage on our existing home, the bigger the mortgage will be on our new home.
Then there’s the actual issue of being a landlord, even temporarily. It’s not for me. After all, I’m Canada’s worst handyman. I’d end up hiring out the property maintenance, further eroding the already razor thin profit margin.
Finally, there’s my faith in the local real estate market. Lethbridge seems to have more of a steady 2-3% a year housing market than a boom and bust housing market. So, likely no potential for a real estate lottery pay-off in a short-time frame.
Related: Was My House A Lousy Investment?
For those reasons, turning our existing house into a rental property after we move is a last resort option.
This Week’s Recap:
Last week we got the official word that the annual TFSA limit will increase to $6,500 in 2023. That takes the lifetime TFSA limit to $88,000.
Also of note, CPP recipients will get a 6.3% increase in their benefits in January based on the inflation numbers for 2022.
Many thanks to Paul Brent of the Globe and Mail for including my comments in this piece on tax loss harvesting.
Promo of the Week:
I didn’t take part in Black Friday shopping, but if you’re looking to take advantage of any online deals this weekend make sure to go through a cash back website like Rakuten first to earn a rebate on your purchase.
If you’re new to Rakuten (formerly Ebates), you’ll get a $30 cash bonus when you join today.
In addition to a higher TFSA contribution limit and indexed CPP benefits, Erica Alini says most Canadians will get some tax relief as tax brackets also get adjusted upwards by 6.3% (subs).
What should you do with your mortgage in a rising interest rate environment? Jason Health at Objective Financial Partners shares some strategies.
Andrew Hallam says that by saving $500 a month, you could have $12,100,000 over 60 years if you keep asking this one question.
Should RRIF withdrawals be based on the younger spouse’s age? It depends.
A Wealth of Common Sense blogger Ben Carlson rights says the markets can’t save you if you can’t save.
Of Dollars and Data blogger Nick Magiulli turned 33 and wrote a great piece on learning to live.
Stop thinking about what you are retiring from and start thinking about what you’re retiring to.
Most investors are experiencing hefty double-digit losses. Andrew Hallam explains why we aren’t far removed from chimpanzees:
Smart investing isn’t about chasing past returns or coveting what others own. Instead, it’s about owning a globally diversified, low-cost portfolio. It’s about maintaining a consistent allocation through thick and thin. That means rebalancing as needed: selling pieces of “winners” and adding the proceeds to the “losers.”
Index investing as a theoretically optimal investment strategy works best in an efficient market, but if everyone turns into a passive index investor the market can’t be efficient. Ben Felix explains what this paradox means:
Rob Carrick on what the Algonquin Power debacle says about dividend stocks versus GICs (subs).
My Own Advisor Mark Seed shares his financial independence update. Inspiring stuff!
A Wealth of Common Sense blogger Ben Carlson again, this time comparing now disgraced FTX founder Sam Bankman-Fried versus The Match King Ivar Kreuger.
Finally, long-time Wall Street Journal personal finance columnist Jason Zweig shares his suggestions for the books every investor should own.
Have a great weekend, everyone!
The federal government has increased the annual TFSA contribution limit to $6,500 for 2023 – an increase of $500 over the annual TFSA limit that we had between 2019 and 2022. It’s good news for Canadian savers and investors, who as of January 1, 2023, will have a cumulative lifetime TFSA contribution limit of $88,000.
The Tax Free Savings Account (TFSA) was introduced in 2009 by the federal conservative government. The TFSA limit started at $5,000 that year – an amount that “will be indexed to inflation and rounded to the nearest $500.” With inflation coming in hot at 6.3% in 2022 (versus 2.4% in 2021) the TFSA limit was widely expected to increase this year.
TFSA Contribution Limit Since 2009
The table below shows the year-by-year historical TFSA contribution limits since 2009.
|Year||TFSA Contribution Limit|
Note that the maximum lifetime TFSA limit of $88,000 applies only to those who were 18 or older as of December 31, 2009. If you were born after 1991 then your lifetime TFSA contribution limit begins the year you turned 18.
You can find your TFSA contribution room information online at CRA My Account, or by calling Tax Information Phone Service (TIPS) at 1-800-267-6999.
The Tax Free Savings Account is a flexible vehicle for Canadians to save for a variety of goals. You can contribute every year as long as you’re 18 or older and have a valid social insurance number.
That means young savers can use their TFSA contribution room to establish an emergency fund or save for a down payment on a home. Long-term investors can use their TFSA to invest in ETFs, stocks, or mutual funds and save for the future. Retirees can continue to save inside their TFSA for future consumption or withdraw from their TFSA tax-free without impacting their Old Age Security or GIS.
Unlike an RRSP, any amount contributed to your TFSA is not tax deductible and so it does not reduce your net income for tax purposes.
- Your contribution room is capped at your TFSA limit. Excess contributions will be taxed at 1 percent per month
- Any withdrawals will be added back to your TFSA contribution room at the start of the next calendar year
- You can replace the amount of your withdrawal in the same year only if you have available TFSA contribution room
- Any income earned in the account, such as interest, dividends, or capital gains is tax-free upon withdrawal
How to Open a TFSA
Any Canadian 18 or older can open a TFSA. You are allowed to have more than one TFSA account open at any given time, but the total amount you contribute to all of your TFSA accounts cannot exceed your available TFSA contribution room.
To open a TFSA you can contact any bank, credit union, insurance company, trust company or robo-advisor and provide that issuer with your social insurance number and date of birth.
The most common type of TFSA offered is a deposit account such as a high interest savings account or a GIC.
You can also open a self-directed TFSA account where you can build and manage your own savings and investments.
Qualified TFSA Investments
That’s right – you’re not just limited to savings accounts and GICs. Generally, you can put the same investments in your TFSA as you can inside your RRSP. These types of allowable investments include:
- Mutual funds
- Exchange-Traded Funds (ETFs)
You can contribute foreign currency such as USD to your TFSA. Note that your issuer will convert the funds to Canadian dollars. The total amount of your contribution, in Canadian dollars, cannot exceed your TFSA contribution room.
If you receive dividend income from a foreign country inside your TFSA, the dividend income could be subject to foreign withholding tax.
Gains Inside Your TFSA
Some investors may be tempted to put risky assets inside their TFSA account to try and earn tax-free capital gains. There are two advantages to this strategy:
- Earn tax-free capital gains
- Potentially increase your available TFSA contribution room
For example, I maxed out my annual TFSA contributions in 2009, 2010, and 2011. That meant contributions of $15,000. I invested these funds in dividend paying stocks, which, over time, increased the total portfolio value to $19,500.
I withdrew the entire amount in mid-2011 to top-up the down payment on our new house. When the calendar turned to 2012, I had a new lifetime TFSA contribution limit of $24,500.
How did I have $24,500 in unused TFSA contribution room available even though most other Canadians had $20,000?
Any TFSA withdrawals are added back to your available TFSA contribution room at the beginning of the next calendar year. That amount was $19,500. In addition, the 2012 TFSA limit of $5,000 was added to my overall TFSA contribution room for a total of $24,500.
Losses Inside Your TFSA
The risk cuts both ways, though.
Let’s say the dividend stock picks inside my TFSA incurred a loss of $4,500. I contributed $15,000 but they’re only worth $10,500 when I need to withdraw the money for my house down payment.
The next calendar year, after I withdrew the funds, I would have only saw $10,500 added back to my TFSA contribution limit, plus the new 2012-dollar limit of $5,000 – for a total TFSA limit of $15,500.
The other downside to an investment losing money inside your TFSA is that you cannot claim a capital loss.
“In kind” TFSA Contributions
You can make “in kind” contributions to your TFSA – for example transferring stocks or funds held in your non-registered account to your TFSA.
According to the CRA, you will be considered to have disposed of the security at its fair market value at the time of the contribution. If that value is more than the original cost of the security, you will have to report the capital gain on your income tax return. However, if the value is less than the original cost, you cannot claim the resulting capital loss.
The amount of the contribution to your TFSA will be equal to the fair market value of the property.
This can be an excellent strategy for seniors and retirees to transfer securities from their taxable investment account and into their sheltered “tax-free” TFSA.
Transfer from your RRSP
You can also transfer an investment from your RRSP to your TFSA. Again, according to the CRA, you will be considered to have withdrawn the investment from the RRSP at its fair market value.
This amount is reported as an RRSP withdrawal and must be included in your income for that tax year.
“The tax withheld on the withdrawal can be claimed at line 437 of your income tax and benefit return.”
If the transfer from your RRSP to TFSA takes place immediately, the same value will be used as the amount of the contribution to the TFSA. If the contribution is delayed or deferred, the amount of the contribution will be the fair market value of the investment at the time of that contribution.
TFSA Over-Contribution Penalty
Unlike the RRSP Over-Contribution limit of $2,000, TFSAs have no such room for error.
Some Canadians have run afoul of the CRA for over-contributing to their TFSA. The excess contributions are subject to a 1 percent penalty tax per month. For example, if you’ve over-contributed $1,000 you would have to pay $10 per month.
If you receive a TFSA excess amount letter from the CRA you should remove the excess amount immediately. Go to CRA My Account for your room limit as of January 1, or complete Form RC343, Worksheet – TFSA contribution room if you have contributed to your TFSA in the current year.
TFSA Impact on Government Benefits
The TFSA has been a tremendous boon for seniors and retirees. The main advantage is that any income earned inside your TFSA, or amounts you withdraw from your TFSA, won’t impact means-tested government benefits such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS).
That means retirees could get a portion of their retirement income from their TFSA and not have that amount increase their total net income. This is beneficial to either preserve GIS benefits or to avoid the dreaded OAS clawback.
TFSA income or withdrawals will also not affect employment insurance benefits, or your eligibility for other credits such as the Canada child benefit (CCB), the working income tax benefit (WITB), the GST credit, or the age amount.
TFSA Beneficiaries and Death of TFSA Holder
There are two types of TFSA beneficiaries:
- A survivor who has been designated as a successor holder
- Designated beneficiaries, such as a survivor who has not been named successor holder, a former spouse or common-law partner, children, and qualified donees
A successor holder is a spouse or common-law partner of the holder at the time of death and is named by the deceased as the successor holder of the TFSA.
The successor holder acquires all of the rights of the holder, including the right to revoke any beneficiary designation. This spouse or common-law partner becomes the new TFSA account holder.
The TFSA continues to exist and both its value at the date of the original holder’s death and any income earned after that date continue to be sheltered from tax under the new successor holder.
The successor holder can make tax-free withdrawals from the deceased holder’s TFSA account. He or she can also make new contributions to that account, subject to their own unused TFSA contribution room.
Investing Ideas for your TFSA
The TFSA is an incredible savings tool. Low income earners should primarily use their TFSA to save for retirement, while higher income earners should maximize their RRSP contributions first, but ideally contribute to both their RRSP and TFSA.
Related: A Sensible RRSP vs. TFSA Comparison
Here are my recommendations for the best TFSA investments for long term savers:
Invest with a Robo Advisor: Robo-advisors offer Canadians an easy and hands-off way to automatically invest for the future. Open a TFSA at a robo-advisor like Wealthsimple and you can invest in a diversified portfolio of index ETFs for a management fee of 0.50 percent, plus the MER of the ETFs, for a total cost of about 0.65 percent.
DIY Invest with ETFs: Investors who are more inclined to take the wheel themselves can open a self-directed TFSA account at a discount broker like Questrade and build their own investment portfolio. With the introduction of one-ticket asset allocation ETFs from the likes of Vanguard, iShares, and BMO, it’s never been easier to build a globally diversified portfolio on the cheap. Vanguard’s VBAL, for example, represents the classic 60/40 balanced portfolio and comes with a MER of just 0.24 percent.
Invest in bank index funds: Maybe you’re more comfortable staying at your home bank and investing through an advisor. Know that every bank offers its own suite of index funds, which are considerably cheaper than their actively managed cousins and tend to outperform. Open a TFSA account at your bank and insist on getting a portfolio of index funds. TD’s popular e-Series funds are the most highly rated and lowest cost of the bunch and will cost around 0.45 percent. Expect the other banks’ index funds to cost closer to 1 percent.
As for me, I’ve explained before exactly how I invest my own money, holding Vanguard’s All Equity ETF (VEQT) across all accounts – including inside my TFSA at Wealthsimple Trade. I prefer to use my TFSA for long-term investing rather than as a place to stash cash in a high interest savings account. Tax free growth for the win!