A study published in the Canadian Tax Journal raised doubts about the effectiveness of Tax Free Savings Accounts and whether TFSAs really help Canadians save more. The study showed that one-third of TFSA contributions would have otherwise gone into RRSPs – something the authors called a displacement effect. Furthermore, the remaining 66 percent of contributions came from new savings or money funnelled from non-registered accounts.
And while 10 percent of contributors maxed out their TFSA contributions in 2009, the first year of existence, only 2 percent made the maximum contribution in 2015 (to be fair, that was the year the federal government increased the TFSA limit to $10,000).
The point of the TFSA was to complement existing registered savings plans, which limit the amount one can contribute to 18 percent of income in a given year. Should it be concerning that Canadians are shifting some of their RRSP dollars to their TFSA? Yes, if it means Canadians are saving less than before for retirement.
My take on TFSA use? Young people use it for short-to-intermediate goals, like a vacation, car, or house downpayment. No problem there. Older Canadians use it to shelter previously saved money in their non-registered accounts. That’s smart retirement planning. Wealthier Canadians use their TFSAs exactly as the government intended – now maxing out both their RRSP and TFSA limits each year.
Blame the banks for our lower TFSA uptake and continued misunderstandings about how the account works. After all, when TFSAs were first introduced in 2009 it was the banks who advertised it as a “high interest savings account.” Combine that with our lack of understanding about the contribution and withdrawal rules, plus the fact that TFSAs can be used for more than just cash savings, and you have one confused populace.
Finally, the flexible withdrawal rules make TFSAs prime for raiding the account to pay off debt, renovate the home, buy a car, travel, you name it. The fences around your RRSP, namely withholding taxes and paperwork, tend to stop us from raiding the account before retirement.
Has the TFSA been a disappointment 10 years after it was introduced? Hardly. The flexible account can be used for a variety of purposes, and Canadians of all ages are proving that to be true. I wish the TFSA had been there for me at age 19, when I was inexplicably contributing to my RRSP despite a low income and many short-term financial goals ahead of me. As a retiree, the TFSA will be a boon that provides tax-free retirement income that does not impact means-tested benefits such as OAS.
This Week(s) Recap:
We got home safe and sound late Monday night after a 22-hour day of travel. Not without incident, however, as we discovered a nail in one of our tires when leaving the Calgary airport parking lot. Seriously. After a quick trip to Canadian Tire we got the tire replaced and managed to get home safely.
I’m thankful that our return flight, which was originally scheduled to arrive in Calgary at close to midnight, was changed to arrive at 6:30pm, so we were able to find an open tire shop and didn’t have to spend another night in a hotel.
I managed to write two posts since my last Weekend Reading update from Ireland. The first gave a mid-year update on my net worth. It’s incredibly motivating to cross the $750,000 mark and get closer to my goal of becoming a millionaire by the end of 2020.
The second post looked at doing things the easy way or the hard way and compared Canada’s mutual fund industry to paying the full retail cost of a direct flight.
Promo of the Week:
I cannot speak highly enough about the Scotia Passport Visa Infinite card, which I used predominantly on our trip to Scotland and Ireland. I got it for the no foreign exchange fees and juicy 25,000 point sign-up bonus. But what really impressed me was the instant email notifications each time I made a purchase overseas. It allowed me to easily keep tabs on our budget (in Canadian dollars), which came in handy for a month-long vacation.
One final word about using credit cards abroad. Often you’ll get asked or prompted to make the purchase in local currency or in Canadian dollars. Always choose local currency to avoid any hidden mark-up or fees charged by the retailer or merchant.
Something I’m sure we’ve all felt at some point in our lives – is everyone richer than me?
Mike, The Dividend Guy, quit his job in finance two years ago to focus on his blog and shares the dream, frustrations, and achievements.
Mark Seed sold his home and moved to a condo in downtown Ottawa. He shares his moving survival tips here.
Personal finance gurus (not me!) really hate coffee. Here’s a good take on why buying coffee won’t make you poor.
“Finance traditionalists might have notched a victory or two along the way, but their war against Starbucks and its ilk was over before it had even begun.”
Ben Carlson explains why everything we think we understand throughout history is probably at least a little wrong.
In his latest Common Sense Investing video, Ben Felix explains why it’s wrong to evaluate your investment decisions based on its outcome:
Decumulation is one of the greatest financial planning challenges. Here are three common mistakes retirees make when drawing down assets.
Winding down an RESP account is another tricky endeavour. Here’s Frugal Trader using a GIC ladder for RESP withdrawals.
Michael James helped a friend buy a car and wrote about estimating the value of 0% financing.
Finally, Dale Roberts and the newly redesigned Cut the Crap Investing blog looks at whether retiring baby boomers will destroy the stock market.
Have a great weekend, everyone!