My TFSA Dilemma and Solution

I embraced the tax free savings account with open arms when it was first introduced back in 2009. I made the maximum $5,000 contribution in 2009 and again in 2010. My TFSA game was strong, indeed, as I invested those funds in Canadian dividend paying stocks and quickly turned $10,000 into $15,000.

But then I raided my TFSA to top-up our house downpayment in the summer of 2011 and, after just a couple of one-time deposits in the last five years, the account sits today at less than $4,500.

So now my TFSA contribution room is a lofty $50,500 and I confess that I’ve felt a bit paralyzed about how to treat this account going forward.

My TFSA fail

My TFSA Dilemma

The beautiful thing about TFSAs is that they can be used for just about anything. Emergency fund? There’s a TFSA Savings Account for that. Prefer something that pays a higher interest rate for 1-3 years? Lock into a TFSA GIC. Looking for long-term results? Use your TFSA to invest in individual stocks, ETFS, bonds, or mutual funds.

But all of that flexibility can mean difficult choices for savers and investors who are looking to get the most out of their TFSA.

I didn’t necessarily start saving inside my TFSA with the intention of cashing out two years later. If I did, I would have put my money into a savings account or GIC instead of into the stock market. As it turned out, my investments were up big and I decided to use that money to top-up our downpayment and avoid costly CMHC premiums.

Five years later and it’s clear I haven’t prioritized TFSA contributions at all. Instead, we bought a car, developed the basement in our new home, and poured our savings into my RRSP and into the kids’ RESPs.

I was paralyzed by the large amount of contribution room available – nearly $100,000 when you consider my wife’s unused TFSA room. I felt like I needed to make big TFSA contributions each year or it wouldn’t be worthwhile.

Not only that, I had to decide whether my TFSA should be used for short-term, medium-term, or long-term savings, and how that would fit into our financial plan.

My TFSA solution

Of course, I’m familiar with terms like ‘pay yourself first‘, or ‘the best time to start saving is now‘. I know I should have simply started contributing $25 or $50 a month towards my TFSA back in 2012. I wouldn’t have missed the money at all, in fact, I probably would have upped the contributions each year like I’ve done with our RESPs. But here we are.

My plan is to turn our $825 monthly car payment – which ends in October – into future tax free savings account contributions, starting in January 2017. That’s $10,000 per year to stash inside my TFSA, which at that rate would catch-up all of my unused room by 2027.

I’ve decided to treat my TFSA as a long-term retirement savings plan (part of a three-pronged approach to developing retirement income streams from my defined benefit pension plan, RRSP, and TFSA).

My long-term investments are held in just two ETFs – Vanguard’s VCN and VXC – which means I’ll be buying VCN inside my TFSA and keeping VXC and a bit of VCN inside my RRSP to achieve an overall mix of 25% Canadian, 75% U.S. and International investments.

Final thoughts

I’ve committed a cardinal sin by neglecting my TFSA for the last five years and letting other financial priorities get in the way. I thought that starting small wouldn’t be worthwhile – that I needed to make BIG contributions or I shouldn’t even bother. I also wasn’t entirely sure if I should go all-in with a long-term ETF approach inside my TFSA or keep a bit of cash on-hand for shorter-term goals.

Now I finally have some clarity about what to do with my TFSA going forward. The source of funding these contributions will be freed-up in a few short months, I have a solid plan in place, and I can’t wait to start building up my tax free savings account again!

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  1. Liz Johnson on July 25, 2016 at 4:56 am

    I’m still wrapping my head around an $850 a month car payment.

    • Echo on July 25, 2016 at 6:53 am


    • Leanne B on July 25, 2016 at 3:35 pm

      A vehicle around $50,000 could easily be $825/month with no money down over 5 years. Or a less expensive vehicle over 3 years. If he found a financing option with a very low interest rate it probably made sense to spread this out over time, especially with a young family and other conflicting financial priorities.

  2. Nicole on July 25, 2016 at 5:03 am

    I put a measly $50 a pay into my TFSA automatically. I haven’t missed the money at all. That said, I have loads of unused contribution room but I’m not sure if I’m using it long term or short term.
    I will likely blend it a little as I used a chunk of money to buy new floors a few years ago. It felt very good to do that renovation in cash.
    Thanks for the posts, they make me think about things!

    • Echo on July 25, 2016 at 6:59 am

      Hi Nicole, thanks for sharing your approach to TFSAs. The account is so flexible that once you have a bit of money saved I think it’s reasonable to put some in index funds or ETFs and then keep some cash on hand for those short- to medium-term goals.

      Best to think of your financial plan and what your top 3-5 goals will be, and then save accordingly.

  3. David on July 25, 2016 at 5:10 am

    Thoughtful article. Imagine how many Canadians have money, regardless of its purpose, in taxable accounts rather than open a TFSA. I have to believe it’s a ridiculous amount.

    • Echo on July 25, 2016 at 7:03 am

      Hi David, I’d have to agree with you. I think many Canadians have also opened TFSAs without realizing they are more than just savings accounts; that you can invest in stocks, bonds, mutual funds, and ETFs.

  4. Gary Radford on July 25, 2016 at 5:40 am

    I am 67. Was middle income My Rrsp withdrawals are being taxed at a higher rate than the deposits were 30 years ago. So maximize tfsa and have flexibility, same tax free accumulation, if you have the regiment to leave an increasing amount each year for retirement

    • John Russell on July 25, 2016 at 3:07 pm

      Something to take into consideration about TFSAs vs. RSPs is that deposits into your TFSA are after tax money. Only the gains/income from the TFSA are tax free. Another thing. If you multiply your gains by your average tax rate you may be surprised at how little tax you actually save. Still, a little saving is better than none.

    • John Russell on July 25, 2016 at 3:12 pm

      Hi Gary,
      I found myself in your exact same position. My solution was to bite the bullet, de-register my RSP, pay the tax, then re-invest the balance in my regular account.

  5. Galove on July 25, 2016 at 6:59 am

    Could you please explain how you managed to achieve contribution room of $50,500. I have done the maximum amount every year which totals $46,500. The amount for 2016 according to CRA is reduced to $5500. I think you are making the assumption it remained at 10k for 2016.

    • Echo on July 25, 2016 at 7:09 am

      Hi Galove, I’m glad you asked that. There’s no mistake.

      Remember, I turned my original $10,000 contribution into $15,000 (height of the dividend stock rally in 09-11). Then in 2011 I withdrew $14,000. That extra $4,000 gets added back as future contribution room the following calendar year. Nice, eh?

      • Maria on July 25, 2016 at 9:59 am

        I think you are able to recontribute the whole amount you withdrew the following calendar year, which is fourteen thousand not four thousand.

        If I am mistaken could you please point out what TFSA rule you are following?

        Thank you

        • Echo on July 25, 2016 at 10:14 am

          Hi Maria, you’re right – the $4,000 in profit, plus the original $10,000 got added back the following calendar year. Sorry if that wasn’t clear.

      • Galove on July 26, 2016 at 6:38 am

        Hi Echo,

        Thank you for the response as I was always under the impression that if you took money out the most you could recontribute is the maximum amount set by the government which is currently at $46,500. This great news as my TFSA will probably break the $100k mark this year – the only investments I hold inside my TFSA are REITS which pay between 5% – 10% dividend (AX.un, SOT.un, PRV.un , DRG.un to name a few)

        REITS were beaten up back in 2009 and represented excellent value. I am a active investor and will sell REITS when I feel the stock price is getting ahead of itself and then buy back in when they pull back.

        Your explanation also explains why the Trudeau government is not a fan of the TFSA and the fact some people have built 1$ million TFSA — see this article how to build $1-Million TFSA.

  6. Bob Dubask on July 25, 2016 at 8:54 am

    I believe your TFSA Contribution room today is actually $56,500. You can recontribute the TFSA contributions withdrawn the following year, but not any profits taken.

    • Echo on July 25, 2016 at 10:27 am

      Hi Bob, no – it’s $50,500.

      2009 – $5000
      2010 – $5000
      2011 – $5000
      2012 – $5000
      2013 – $5500
      2014 – $5500
      2015 – $10000
      2016 – $5500

      Total contribution room = $46500.

      In 2011, I withdrew $14,000. That amount (the entire amount) got added back to my contribution room the following calendar year (so in 2012).

      My total available TFSA contribution room = $50500

      This is taken from CRA’s MY Account, which hopefully clears up the withdrawal and new contribution room from 2011-12:

      Calculation of 2012 TFSA contribution room

      TFSA contribution room on January 1st, 2011: $5,000.00
      Minus contributions made in 2011: $0.00
      Unused TFSA contribution room at the end of 2011: $5,000.00

      Plus withdrawals made in 2011: $14,000.00
      Plus TFSA dollar limit for 2012: $5,000.00
      Subtotal of withdrawals plus TFSA dollar limit: $19,000.00

      TFSA contribution room on January 1st, 2012: $24,000.00

  7. Olliver on July 25, 2016 at 9:28 am

    Here is all the info you need on TFSA in the form of Q&A’s
    I hope it helps everyone

    Here is an excerpt from the link above

    Q: How much can I contribute?

    A: The TFSA contribution limit for 2016 is $5,500. You can also carry forward any unused contribution room from previous years. The annual contribution limit was $5,000 from 2009 to 2012, $5,500 from 2013 to 2014 and $10,000 for 2015.

    1Annual TFSA contribution limit is subject to change by the federal government.

    Q: What if I can’t contribute the maximum contribution amount?

    A: You can carry forward any uncontributed amounts into future years indefinitely.

    So for 2016, you can contribute up to $5,500 (annual contribution limit for 2016) PLUS any unused contribution room from previous years (The annual contribution limit was $5,000 from 2009 to 2012, $5,500 from 2013 to 2014 and $10,000 for 2015.).

    *Annual TFSA contribution limit is subject to change by the federal government.

    Q: How will I know what my contribution limit is for each year?

    A: Every year, the government will calculate how much TFSA contribution room you have available. You will be informed of your contribution limit when you receive your T1 Notice of Assessment.

  8. Tawcan on July 25, 2016 at 10:10 am

    Wow that’s a huge amount for car payment. We have maxed out our TFSA every year and are treating the account as a retirement account that we can use in combination of RRSP.

    • Echo on July 25, 2016 at 10:31 am

      @Tawcan – Yep, looking forward to getting rid of that loan and turning those monthly payments into TFSA contributions 🙂

      It’s a 2013 Sante Fe that just crossed the 50,000KM mark last week. We’ll be driving this car (payment-free) for a loooong time.

  9. Garth Sproule on July 25, 2016 at 5:59 pm

    Would it make sense to place your more aggressive investments in a TFSA and keep any cash that may be needed in the next few years in a non registered account? That way, potential big gains would be sheltered from tax. One downside is that capital losses are not usable inside a registered account.

  10. My Own Advisor on July 26, 2016 at 4:34 am

    Smart stuff Robb. You’re already doing very well with your savings rate and this will help even more.


  11. Jen on July 26, 2016 at 12:24 pm

    My TFSA is almost maxed out. Once it’s done I will start contributing aggressively into my RRSP to get most of the tax back.

    The plan is to try to retire early- withdraw from RRSP the max amount that is not taxed- $12,000 per year I believe and then top this up with tax free dividends from TFSA.

    • Madrigal on July 26, 2016 at 8:04 pm

      $12,000 per year withdrawals from an RRSP are not taxed? Really? Please provide more detail, as I’d love to take advantage of the CRA’s unusual generosity.

      Robb’s story about his TFSA dilemma struck me as not having anything to do with the TFSA, and everything to do with a personal psychological hesitation. He sorted it out not by getting to understand the TFSA better, but by understanding himself better.

      • Jen on July 26, 2016 at 9:31 pm

        If there is no other income it will be under basic personal amount. So not taxed.

  12. Tyler on July 27, 2016 at 9:14 am

    Great article and a great solution to your TFSA dilemma. I know you use a 2 fund approach. Any advice for more conservative investors using the couch potato combination of VCN, VXC and VAB? Between my wife and myself we own that same mix in 4 different accounts (TFSAs and RRSPs), 5 if you include a LIRA from a commuted pension. That means periodic rebalancing requires multiple trades in multiple accounts at ~$10/trade. I’ve always figured there must be a better way but similar to the paralysis you discussed in this article I’ve always defaulted to just doing it this way because I can’t bring myself to figure out a better way. Any thoughts on which funds belong in which account?

  13. Benzenec6h6 on August 11, 2016 at 8:18 am

    Hi Rob,
    Does your self directed investment account charge $10 per trade? As I’m sure you know monthly contributions to these 2 ETFS would incur $240 per year in trading costs: 2.4% of the invested assets.

    At what point would you recommend something like MAW104 with a 1% fee that includes the trading costs?

    • Echo on August 11, 2016 at 9:49 pm

      TD Direct Investing does charge $10 per trade, so I’ll probably make quarterly contributions to keep trading costs down.

      • Benzenec6h6 on August 12, 2016 at 11:34 am

        That sounds reasonable. I guess my other concern would be your 100% equity allocation. You are much younger than I am. As I approach retirement, sequence of returns risk has become an important consideration.

    • Benjamin on January 21, 2017 at 8:52 pm

      It’s free to buy these ETFs with Questrade. They charge for selling, but not for purchasing.

  14. Matthew on August 15, 2016 at 7:05 am

    Hi Robb great post. I have to admit this post sounds like my TFSA story, I have taken money out for a car, college and a trip. I have now begun using it as a long-term retirement savings plan.

    Thanks for sharing


  15. MJ on August 22, 2016 at 12:41 pm

    The TFSA is a great vehicle and I’m glad you have a solid plan in place to fund it. Curious what advice you might give to Canadians with U.S. citizenship? Because the TFSA is treated as a foreign trust – and therefore taxed by the IRS – I can’t use it as a prong in my retirement strategy. It’s so unfortunate. I still can’t get over it. My RRSP is maxed and I’d really like another tax-friendly avenue to save for retirement as a bridge to RRSP withdrawals since I plan to retire in my 50s.

    • Benjamin on January 21, 2017 at 8:57 pm

      Hi MJ,
      I also have the same question. For a Canadian permanent resident from the US, the process of opening TFSA and RSPs is so complex with tax implications. Are there any other good options?

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