Sometimes I think I’m the poster child for what not to do with your TFSA. I opened an account immediately when the TFSA launched in 2009 and contributed the maximum annual amount for three years, investing those funds in a couple of dividend paying stocks. I cashed out in 2011 (with a tidy $4,500 profit) to top-up the down payment on the house we live in now. Then I went years without making a contribution because life happened – we bought a new vehicle and developed the basement in our home – so TFSA contributions went on the back burner.
Once we paid off the car and the basement renovation I got super aggressive with my TFSA contributions to make up for lost time. I finally caught up on my lifetime TFSA limit in 2020, and then contributed the annual maximum in 2021 and 2022.
Then I drained the entire balance again to use for a down payment on the house we’re building right now. Catching up again will take a herculean effort, but I can use some of the proceeds from our house sale and then double-up on contributions for several years to get there.
Come to think of it, this is exactly the type of thing a TFSA should be used for. When you need a large lump sum of money without any tax consequences.
Most personal finance experts agree that the TFSA should be used for long-term investing. Indeed, when I run retirement planning projections for my clients, we typically touch the TFSA funds last after draining the RRSP/RRIF and non-registered balances.
While that makes for a nice looking retirement plan with a generous (and tax-free) estate, I’m not sure the best use of your TFSA is to leave a pot of tax-free gold at the end of the rainbow.
Consider one-time expenses that may occur throughout your lifetime. It could be a new vehicle, a home renovation, a bucket list trip, a home “upsize” or a vacation property, financial gifts to your adult children, etc. Where else can you pull funds for these expenses without incurring tax and without impacting Old Age Security benefits? And, oh by the way, you get the contribution room added back the next calendar year.
It’s the TFSA, folks!
Listen, I’ve written a lot retirement plans where the client continues to contribute to their TFSA forever while still meeting all of their retirement spending needs. Hey, if you have more income than you need, then contributing to your TFSA all throughout retirement makes perfect sense.
A forever funded TFSA makes for a great hedge against surprise outcomes, spending shocks, healthcare scares, etc. There are a lot of unknowns in financial planning, so a fully funded TFSA can cover a lot of potential issues. But do you need $1M or more stashed away in your TFSA, just in case? I’d argue in some cases you might be saving just for the sake of saving.
We save to fund future consumption. So let’s start earmarking some uses for our TFSA funds. A great place to start is that list of one-time expenses (new vehicle, home reno, bucket list trip, home “upsize” or a vacation property, financial gifts for your adult children before the will is read). Heck, fund a year-long sabbatical with tax-free money. The point is to assign a purpose to the funds in this account rather than blindly saving forever.
I fully expect that I’ll fill-up my TFSA to the max again someday. But I also expect to drain it again for something intentional. I don’t know what that is just yet, but I know I’ll be glad to have a pot of tax-free money available.
Readers: What plans do you have for your TFSA? A forever investment account? Funding large one-time expenses? A bridge for your early retirement years? A “just in case” reserve? Let me know in the comments.
This Week’s Recap
I introduced my long-awaited DIY Investing Made Easy course to help investors set up and fund a self-directed investing account and buy a single asset allocation ETF.
It’s RRSP season, so I reminded investors about the two-step process of making RRSP contributions (contribute, then invest).
It’s also (almost) tax season, so here’s the difference between tax deductions and tax credits.
Finally, many thanks to Mark McGrath for this excellent piece on 8 overlooked ways to save tax in retirement.
Morgan Housel nails it with this piece in the Globe & mail: The art of spending money – and what it reveals about who you really are.
The Fleischman Is In Trouble effect – on the plight of the so-called working rich.
Here’s Ben Carlson on the psychology of market tops and market bottoms.
A pandemic boom attracted scores of Americans seeking gains. Now amateur investors are retreating to the sidelines.
There’s an ongoing trope about poor seniors eating cat food in their old age. That couldn’t be farther from the truth, with just 3.1% of seniors living below the poverty rate (subs):
Andrew Hallam says predicting the stock market is impossible. Human emotions move asset prices, not economics.
Well-respected economics professor Trevor Tombe says the Bank of Canada did its job: Rising interest rates and inflation look to be ending.
Bob French answers the question, exactly how long is the long-term when it comes to investing?
Fred Vettese says future investment returns may be lower. That means younger Canadians will need to save more than their parents for retirement (subs).
Doug Boneparth looks at Gurus Gone Wild – three of the most dangerous types of content on social media.
Jonathan Clements looks at four financial planing and investing concepts that are helpful in theory, but may not work as intended in the real world.
PWL Capital’s Justin Bender shows DIY investors how to invest their kids’ RESP money over time using low cost ETFs:
Rob Carrick shares five tips for navigating an increasingly tricky GIC market (subs).
Here’s Mark McGrath again, this time on the My Own Advisor blog talking about the taxation of investment income in a corporation.
A hidden paradise. Andrew Hallam says this retirement location may be the world’s best kept secret.
Finally, FP Canada is lobbying the federal government for a financial planning tax credit. This is one of the most common questions I get from clients, as fees charged by fee-only financial planners are not tax deductible.
Have a great weekend, everyone!