Weekend Reading: Best Uses For Your TFSA Edition

Best Uses For Your TFSA Edition

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.

Weekend Reading:

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):

Poverty rate for seniors

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!

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  1. Brad S on February 11, 2023 at 1:45 pm

    My current TFSA usage is cash being saved for emergency including being laid off (I’ve been laid off multiple times in my career so a bit paranoid). Based on this article I will probably start a home reno fund too

  2. Stan on February 11, 2023 at 2:18 pm

    We have been retired for 5 years and plan to use our TFSAs last. When one of us dies, the survivor will be in clawback territory if we are withdrawing from RRIFs, so we will use them as well as the small amount of non-registered funds first.

  3. Gert on February 11, 2023 at 2:19 pm

    I started my TFSA like you in 2009 and up until 2015 kept it at Tangerine (formerly ING) but not invested which I regret but didn’t know better. Since 2015 it’s been fully invested and I make my full contribution in January of every year. To date I’ve only made ~ $38K thus my regret for this first 6 years. In any event I can’t go back but I am encouraging my kids to stick to making their contributions every year. We got them started by giving them the full amount needed on their 18th birthday. We did this because we could and due to another of your post regarding inheritance and we believe it’s more fun to see while we’re alive.
    I explained to the kids that by making the deposits could be difficult at times but the sacrifice is well worth it. By no means are we overly well off but I was lucky to meet my wife as we both live by our means and alway ask ourselves before we buy something “Do we need it or do we want it?” Nine times out of ten if the answer is “we want it” we don’t purchase it but put the money aside in savings. It’s worked well for us and although we’ve made sacrifices we still enjoyed our lives with our kids.

    • Jane on February 11, 2023 at 4:56 pm

      Similarly while our kids attended University we contributed to half of their TFSA. It encouraged them to save. They now have $ for a wedding , or a new car if that’s what they want (we drive old cars). The daughter who got 2 degrees has really benefited from this arrangement . We are also gifting them sizeable down payments on their first home. We are not as you say ‘overly well off’ but we’d rather set them up for now vs leaving a seizable inheritance. Fortunately they are all very hard workers and that alone puts them on a path to having a decent life style.

  4. Curt on February 11, 2023 at 3:59 pm

    Robb, could you make a bit of an addendum by commenting on the tax implications of TFSAs in estate planning, ie: spousal transfer & other beneficiaries, as compared to other investment or saving choices? It follows up on the question of needing to save just for the sake of saving.

    • Robb Engen on February 12, 2023 at 6:53 am

      Hi Curt, I cover that in this comprehensive TFSA post: https://boomerandecho.com/tfsa-contribution-limit-overview/

      If the intention is to leave an estate behind then the TFSA is the right account for the job. It’s the account we touch last for a reason. My comments are about *never* touching the TFSA, which I think can be a mistake where retirees don’t live their best lives because they want to keep filling this account up every year.

  5. Paul on February 11, 2023 at 5:11 pm

    My wife (age 70) and I (age 65) are retired, living comfortably off of our RRIF, CPP, OAS, and non registered accounts. Like you we have fully funded our TFSAs but have tapped into them twice (once to buy a vacation cabin and once to provide bridge financing between the purchase of our new home and the. sale of our old one). After our house sold we again fully funded our TFSA and expect to continue funding it for the foreseeable future. Between the the two of us we currently have about 250K in our TFSA’s and our current plan is to save it for our long term care needs if they arise. But as they say … life happens. Who knows what we will actually do with it but it provides comfort knowing it’s there if an emergency arises.

  6. DJ on February 11, 2023 at 9:58 pm

    Hi Robb – I am wondering if you sold funds in your TFSA at some point in 2022? The reason I ask is that I would presume you sold your TFSA off it’s highs (since stock market was down in 2022).

    If yes, how did that make you feel?
    I ask this question as I may be in a similar situation where I may need to withdraw the $100k in my TFSA to close on a pre-con house. It doesn’t make me feel great to sell it today (as the market is still off it’s high). It might be a necessity for me to sell though at some point soon. Would love your thoughts.

    • Robb Engen on February 12, 2023 at 6:46 am

      Hi DJ, I sold almost a year ago to the day once I was sure we were going to go ahead with the purchase agreement for the new house.

      Markets were down a bit, but not close to where they bottomed in June or October.

      I’m an emotionless robot when it comes to investing so I didn’t really *feel* anything – it’s just what I had to do at the time.

      If you need the money, don’t wait. You don’t want to risk a sudden decline in value.

      I transferred the money immediately to an EQ Bank TFSA where I earned a bit of interest until the deposit was due. At least rates are higher today, so you could get 4% or so until it’s needed.

  7. Gruff403 on February 12, 2023 at 9:22 am

    One of the most realistic articles I have read on how to use TFSA and I 100% agree with you! What you describe is an intelligent use of these powerful accounts. We have used ours to cover emergency expenses, pay for trips, pay off unexpected CC debt, gift to kids and money is constantly moving in and out. Considering using one as a fun account and one as a long term savings account for estate purposes. Eventually both will be refilled with inheritance money.

  8. Brenda on February 12, 2023 at 11:34 am

    My TFSA is earmarked for retirement. But your perspective on one time large positive expenses is interesting, especially the year long sabbatical. The flip side is true too, as a one time large negative expense (emergency fund).

  9. James R on February 12, 2023 at 12:47 pm

    Hi Robb,

    I’m curious if you can offer some insight into our situation, regarding our TFSAs?

    Do to poor investing until about three years ago our TFSA’s and RSP’s have little contribution room and are well below the balance where they could have been. On the flip side, we have a sizable non-registered account.

    When I model our retirement I take a modest amount from our TFSAs every year but also top them back up from the non-registered account. This will incur some capital gains but nothing too high given the low annual contribution amount.

    Do you think this is crazy? Over time we will contribute more than we withdraw. I sort of think of this as a non-registered melt-down.

    Any thoughts?

    • Robb Engen on February 12, 2023 at 2:28 pm

      Hi James, it’s tough to say without seeing exactly what’s happening with your accounts and your spending needs (not to mention your age, and whether you’re taking CPP/OAS or have any pension income).

      It sounds like you may be overcomplicating things by making TFSA withdrawals and contributions in the same calendar year. Why not withdraw (or transfer in-kind) $6,500 from your non-registered portfolio to contribute to your TFSA every January, and then also withdraw whatever you need from the non-registered account to meet your annual spending needs?

      It still melts down the non-registered account and fills up the TFSA faster without messing up the tracking of contribution room.

      • Gert on February 12, 2023 at 4:01 pm

        Hi Robb,
        I hope this doesn’t sound too stupid a question but I’ll risk it. If you transfer in kind from a non-registered to a TFSA how does it work out at tax time/season?

        • Robb Engen on February 12, 2023 at 4:22 pm

          Hi Gert, not a dumb question at all.

          The in-kind transfer is still treated as a taxable event. So whether the transfer of funds resulted in a capital gain or a capital loss, you’ll receive a tax slip for that transaction to include on your tax return for that year.

          • James R on February 12, 2023 at 4:44 pm

            Thanks for the reply Robb.

            Regarding a capital loss on an in-kind transfer from a non-registered account to a TFSA, I believe CRA disallow recognizing a loss in this scenario, but of course, if there is a gain that will be taxed.

  10. Alex on February 18, 2023 at 6:36 am

    Hi Robb, this article reminds me of something I’ve been wondering off and on for a while now: if someone has a healthy TFSA, do they still need a separate emergency fund?

    I’ve been thinking that if I ever had an emergency, credit cards would cover any immediate needs until I can turn my TFSA investments into cash, and still pay off the card in time to avoid extra charges. Meanwhile, my current emergency fund could be making even more money in my non-reg accounts than it does sitting in the savings account.

    Am I missing a potential downfall? (Besides my TFSA bottoming out to zero, but if that happens I think there would be worse things happening in the world at that time, ha.) Makes sense to me but I’ve never seen anyone suggest this as an alternative to the standard emergency fund so I might be overlooking an important detail.

    Maybe this could be a mailbag question if you think it’s of potential interest to others. 🙂

    • Robb Engen on February 18, 2023 at 4:56 pm

      Hi Alex, thanks for the question. I think it depends on the nature of your income in retirement (do you have a workplace pension, for instance?), and your willingness to sell investments in your TFSA at a loss to cover emergency expenses. Also, do you have cash queued-up in your RRSP/RRIF or non-registered investments to cover a year or two worth of expected withdrawals? Do you still have a mortgage?

      There are different types of emergencies, too. Replacing an appliance may not constitute an emergency if you typically have a bit of cash set aside for minor repairs and replacement.

      A typical emergency fund is there to cover a period of income interruption, hence the 3-6 months’ worth of spending rule of thumb.

      But that’s not the case for retirees. They’re already retired and should be doing much more careful and thoughtful planning of annual spending needs, including one-time expenses that may come up where you’ll need extra cash. That way you can plan for it in advance, rather than risk an emergency of your car needing to be replaced immediately, or the roof repaired immediately.

      Some of these are unpredictable, so it makes sense to have a bit of extra cash available.

  11. Maxivus on February 18, 2023 at 9:05 am

    Just sharing here;
    I’ve done the learning curve in my TFSA over the years by investing in high fee funds, in dividend stocks, speculative stocks (cannabis craze), and also built a customized factor-tilted ETF portfolio. None of it really mattered without a plan in place and to stick to it.

    The important part I’ve learned over the years, which may be elementary to this group, but to stress the importance of matching your goals with the investments. With Robb’s help and other like minded (Rational Reminder), I’ve been successful sticking to a more simplified approach by using XGRO in the TFSA. Commission free trades with my discount broker, and I know while not tax optimized, it’s good enough for me and it aligns with my plan. I’ve built a short term savings in a HISA separate to my TFSA that covers 5 months of expenses, my goals is 6 months for my plan.

    How does the saying go, investing is like a bar of soap…
    Thanks again Robb for all you do and share here.

    • Robb Engen on February 18, 2023 at 5:03 pm

      Hi Maxivus, thanks for sharing and for the kind words. Glad to hear you’ve found an approach that works for you.

      As Ramit Sethi has said to over-optimizers, “when you hug your parents, do you try to optimize the length of the hug to maximize enjoyment?”

  12. Pam on March 2, 2023 at 7:35 pm

    I have to say I keep topping up my TFSA and I keep it right now like a “F*ck it” I hate my job fund. I could manage for 1 to 2 years now (living very thin) on my TFSA. I may keep it to retirement but I don’t HAVE to. I keep a slush fund for (really not that unexpected) expenses (stupid breaks needing replacement) and if it gets too much I put it in my investment account. But this keeps my hands off my TFSA, keeps me flush to pay off any unexpected bills but still have the freedom to make some personal moves if I felt I needed to.

    Less than 12 months from mortgage free now! Then I can really start cranking up the non-registered investments and looking forward to slowing down at work.

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