Weekend Reading: Renaming The TFSA Edition

Canadians are using their TFSAs all wrong. That was the headline from a Wealthsimple news article posted last week, highlighting a BMO survey showing that 47% of Canadian TFSA owners have their tax-free savings sitting in cash.

The article triggered a host of ‘hot takes’ like this, saying that we ought to rename the TFSA as a TFIA (Tax Free Investment Account). I think that’s a lazy, out of touch take that’s akin to saying, “we ought to teach personal finance in school.” (we do, and it’s not that simple).

Listen, I’m all for using your TFSA as a long-term investment vehicle, as a complement to your RRSP or defined benefit pension plan. In fact, one opportunity I’m constantly pointing out to my well-off clients is to take more risk in their TFSAs.

Indeed, if you’re in the fortunate position to be able to max out your TFSA every year, and will likely continue to do so throughout retirement, then why not treat that account like a long-term investment vehicle and crank up your equity allocation?

But how many everyday Canadians are in a position to do this? Not many, I’ll argue.

The same BMO survey pointed out that the median TFSA balance was just $41,510 in 2023 (the cumulative lifetime limit was $88,000 that year), and that TFSA usage was only around 62% of eligible Canadians.

So, I’m going to take the other side of this debate and say that everyday Canadians are mostly using their TFSAs correctly for their circumstances.

Think of it this way: if you had $50,000+ of unused TFSA room and no real prospects for maxing it out anytime soon, why wouldn’t you carve out a portion of that room to hold your emergency fund? Or use it to save up for your next vehicle purchase?

In other words, why hold emergency or short-term cash savings in a taxable account when you have a boatload of tax-free room inside your TFSA?

While I understand the sentiment behind changing the name of the TFSA to a TFIA, I don’t think it’s the “S” in the name that is psychologically holding people back from using it as an investment account.

I don’t hear anyone making the same case to rename the RRSP, FHSA, RESP, or RDSP. What do they all have in common? The word “Savings”. Yet you can still invest inside of those accounts.

Why all the fuss over the TFSA?

I think the real reason people hold a disproportionate amount of cash in this account is because they have lots of unused TFSA room and so they are simply using it as their emergency fund or short term savings account and don’t want to incur taxable interest. And there’s nothing wrong with that.

Using your TFSA for investing implies that you have money to invest for longer time horizons, and I think it’s a bit out of touch for the financial community to chastise regular folks for not using a TFSA “correctly” as an investment account when many people don’t have the luxury of using both the RRSP and the TFSA as a retirement or long-term vehicle.

Promo of the Week:

The Canadian Financial Summit is just around the corner and I am excited to take part in what is now Canada’s largest personal finance and investing conference.

Check out the impressive line-up of 40+ Canadian personal finance experts who will share the virtual stage.

I’ll be there along with Rob Carrick, Shannon Lee Simmons, Preet Banerjee, and the killer Objective Financial Partners team led by Jason Heath, Brenda Hiscock, and Hannah McVean.

My session is focused on retirement, specifically around tax efficiency and what you can expect when it comes to spending, income splitting, RRSP meltdowns, and more.

The Canadian Financial Summit takes place October 21st to 24th and you can grab your free ticket here.

I hope you enjoy it!

Weekend Reading:

Daniel Crosby argues that our financial behavior is shaped far more by the situations we put ourselves in than by the willpower we bring to them.

Before you max everything out, read this excellent piece by Julia Chung at Spring Plans.

Your 60/40 balanced portfolio might have drifted closer towards a 75/25 growth portfolio after a strong 3.5 years of stock returns. Is it time to rebalance your portfolio?

The Wealthy Barber David Chilton is retiring at the end of the year. Here’s his parting wisdom for Canadians (Toronto Star subs).

I was a guest on The Great Canadian Piggy Bank podcast talking about teaching kids about money and how we should pump the brakes on trying to turn our littles into mini Warren Buffetts:

Morgan Housel writes that the goal of some parents is to work so hard that their kids and grandkids get to live a life that appears spoiled by the standards of previous generations.

Finally, I loved this piece by Andrew Hallam on cryptocurrencies and the stories that make us human.

Have a great weekend, everyone!