Weekend Reading: TFSA Catch-Up Edition
Some readers were appalled to learn that my wife and I completely drained our TFSAs in 2022 to fund a larger down payment on our new house. Okay, maybe not appalled – but it did raise a few eyebrows.
Remember, inflation was running hot and interest rates started to rise in March of that year. While we didn’t know the extent of the eventual rate hikes, it was clear that our new mortgage interest rate would be substantially higher than our existing one.
Besides that, we didn’t want to sell our existing house until we took possession of our new home. That meant taking on new debt from both a home equity line of credit and a builder mortgage (used to fund the new house construction at specific stages of completion). Both of these loans were floating at Prime rate – which eventually ended up at 7.2%.
Not relishing the prospect of carrying a larger mortgage balance at an ever increasing interest rate, we made the decision to tap into our TFSAs to the tune of about $175,000. That helped fund the first two construction draws before we had to turn to our lines of credit.
We moved into the house in April 2023, sold our previous house in May, and held back about $50,000 from the sale to pay for landscaping, window coverings, and some furniture.
Fast forward to 2024 and my wife and I are still sitting here with empty TFSAs. Well, until now.
On Friday we each made a $9,000 contribution to our TFSAs, with a goal of each contributing a total of $28,000 in 2024.
Here’s my TFSA catch-up plan:
- 2024 – $28,000
- 2025 – $28,000
- 2026 – $28,000
- 2027 – $40,000
- 2028 – $35,000
That will get me fully caught up on unused room, plus the new annual room accrued each of those years. From 2029 onward I’ll only need to make the annual maximum contribution to my TFSA.
My wife has less overall contribution room, so she’ll need to contribute $28,000 per year from 2024 to 2027, and then contribute $13,000 in 2028 to fully catch up on her TFSA contribution limit.
How are we contributing at such a high rate for the next five years? Part of it comes from one-time expenses we incurred in 2022 and 2023 that can now be redirected towards savings.
But we also made a conscious decision to pay ourselves more from our business so we can fund the extra TFSA contributions. The trade-off is that we’re investing fewer dollars inside the corporation.
It’s a delicate balance to pay yourself enough to fund your personal spending and savings goals, while retaining earnings inside the corporation to invest and grow at a lower tax rate (hopefully to fund future consumption).
The upcoming changes to the capital gains inclusion rate inside of corporations was also a key consideration.
We’ve already triggered a capital gain inside of our corporate investing account of about $70,000, which, after some nifty accounting, we’ll be able to withdraw $35,000 tax-free as a capital dividend.
Finally, it just made good sense to pay a bit more tax upfront over the next five years to fill up our TFSAs quickly and get those funds invested and growing tax-free for the long haul.
So, fear not, dear readers. Our TFSAs will be maxed out again soon. Hopefully we can stay away from any new show homes for while and they’ll stay that way 🙂
This Week’s Recap:
In last week’s edition I celebrated our investments surpassing the $1M mark for the first time. I’m really excited to add our TFSAs back to the mix of accounts and really give us a diversified set of options to draw from in retirement.
From the archives: A look at closet indexing – the dirty little secret of the mutual fund industry.
A final update on our mortgage switch from TD to Pine Mortgage. Pine came through and got the mortgage switched before the end of the month, and I can’t say enough good things about working with them so far. Your mileage may vary, of course, but they got the job done.
TD, on the other hand, discharged the mortgage on April 30th and then still took our monthly payment out on May 1st. Not cool!
Promo of the Week:
Want to earn some serious credit card rewards? Start with the Amex Cobalt card – the best card for everyday spending in Canada with 5x points for food & drink. Sign up and spend $750 per month on this card to get an extra 15,000 Membership Rewards points (plus the 45,000 points you’d earn if you spend $750 per month on a 5x spending category).
Then use your own referral link to refer your spouse or partner (called: activating Player 2), and have them do the same thing. This could be worth a total of 120,000 Membership Rewards points in a year, plus another 10,000 for the referral bonus.
Next, use this link to sign up for your own American Express Business Gold card and earn 75,000 Membership rewards points when you spend $5,000 within three months. Then activate your player two for a chance to earn another 90,000 points (15k referral plus 75k welcome bonus).
If you’re looking for hotel rewards, this one is an absolute no-brainer card to have in your wallet. The Marriott Bonvoy Card gives you 55,000 bonus (Bonvoy) points when you spend $3,000 within the first three months. Not only that, you get an annual free night certificate to stay at a category five hotel (easily worth $300+), making this a card a keeper from year-to-year. The annual fee is just $120.
Weekend Reading:
Of Dollars and Data blogger Nick Maggiulli explores why people make “bad” financial decisions.
A nice piece on the rise of zero-based budgeting, a system in which you assign a job to every dollar of gross income.
Author Morgan Housel smartly explains how to think about debt:
“Once you view debt as narrowing what you can endure in a volatile world, you start to see it as a constraint on the asset that matters most: having options and flexibility.”
Should you max out your RRSP before converting it to a RRIF? Jason Heath explains what to consider before making this pivotal conversion.
Mark Walhout highlights the risks of adding your children to your accounts:
On a similar note, estate & trust professional Debbie Stanley answers an often asked question – can transferring ownership of a house help avoid probate tax?
Rounding out the estate planning trifecta, here’s Aaron Hector on whether you are tax planning for you, or your estate:
“In a nutshell, every dollar of income that you accelerate is a dollar of income that you don’t have to report in the future, and you get to choose what tax rates get applied to that dollar; the current marginal rate, or the future marginal rate (which could be higher). It’s easy to see how this process can result in your paying a lower average lifetime tax rate.”
Ontario’s Sunshine List discloses the salaries of government employees making more than $100,000, but hasn’t been adjusted for inflation since debuting in 1996. Preet Banerjee says the directory, which now has more than 300,000 names on it, is mostly a list of people who can’t afford to buy a home in Ontario.
Finally, Jason Heath answers the following question – Do all the advice articles about waiting to take CPP at age 70 take into account the calculation of your eligible amount if you stop working and contributing at, say 60 years old, and therefore have 10 years of no contributions?
Enjoy the rest of your weekend, everyone!
Hi,
May I ask where do you have your corporate investment acct? I.e. which brokerage is a good choice.
TYIA !
Hi Maria, our corporate investment account is at Questrade. Note, that is not an endorsement. It took us 45 days to open the account, and I don’t love the platform. It’s “fine” now that the account has been open for a few years and we contribute regularly, but I would move to Wealthsimple Trade (self-directed) if and when they make these account types available.
I’d stick with your main bank’s self-directed brokerage platform – particularly BMO InvestorLine or Scotia iTrade as there are no fees for buying certain ETFs.
Rob, just curious why you took money from your TFSA instead of from your Corp, as the TFSA is a more tax efficient account than a Corp account. Ben Felix published some work on this subject a few years back.
https://www.pwlcapital.com/resources/a-taxing-decision-2017/
Hi Grant, we simply didn’t have that much in the corp at that time – and certainly wouldn’t have the same amount after-taxes versus just drawing from the TFSAs.
Hi Robb, thanks a lot for what you do. Can I ask what you did to realize a 70k capital gain in your corp?
Hi Simon, thanks!
We have a corporate investing account at Questrade where we invest excess profits in VEQT. There was about a $70,000 unrealized gain (difference between book cost and market value) so I sold all ~9400 units of VEQT to realize the gain, and then immediately bought VEQT again to stay invested.
I spoke with our accountant and he’ll file an election for a Capital Dividend (note this comes with a fee – about $1,000 in this case) on our next tax return. We’ll pay taxes on the capital gain inside the corp, and can take out half of the gain tax-free personally.
I thought that type of sell and quick rebuy isn’t recognized by CRA unless there’s 30 days between transactions – or is that only with losses?
Hi Frito, that’s just for losses. There’s no superficial gain rule.
Hi,
To get your TSFA from $9k to $28k within this year looks like a +300% gain. I’m exceedingly curious what you’re investing in within your TSFA. Seems quite high risk. Any recommendations for good gains but not that level of risk?
Hi Marnie, I’m just talking about contributions – I’m going to contribute $28k by the end of this year, but just started with $9k earlier this month.
I have no idea what that will turn into for returns, but I’m investing in Vanguard’s All Equity ETF (VEQT).
Thanks Robb. I clearly misread your article – much appreciated, and for the info on the ETF fund.
Hi Rob,
My wife and I are now drinking your Kool aid. We have moved a bunch of cash over to Wealthtrade to take advantage of the 5% rate, have let our CFA go (nice guy but we didn’t want to pay for him anymore) and are doing our own investing. We have full intentions of getting your highest level of support once the dust all settles.
For now, we have a large amount of cash that we will DCA back into the market, that said is there a way I can contain the 5% WS cash account inside of the TFSA whilst I look around and buy back in?
Thanks for all your excellent articles !
Phil
Another one of the great features of the TFSA, lifetime replacement of withdrawals including growth. Very underrated and misunderstood savings vehicle that should be promoted more IMO.
VFV vs VEQT.
While VFV is essentially the S&P index at 0.08% and obviously US focused.
VEQT is the whole world and 0.22% MER.
They have a 90% correlation meaning they essentially own the same stocks and will go up and down together.
I’m so torn between using your approach vs VFV.
Any thoughts?
I don’t know, Ravi. VFV is 500 large cap US stocks. It’s a bet on continued outperformance by large cap US stocks over the rest of the world.
I’m not comfortable making that bet over the long-term, particularly at today’s high US stock prices.
VEQT is 13,500 global stocks, and still has plenty of US equity exposure. It’s a safer, more reliable bet in my mind.
Don’t forget the US had a lost decade between 2000-2009 where stocks returned 0%. Canadian and international stocks outperformed during that period.
All that said, it’s like telling someone not to invest in Toronto or Vancouver real estate. Despite the high prices and threat of mean reversion, home buyers have done extraordinarily well and may continue to do so for the foreseeable future. Nobody knows.
Agreed. That lost decade for US stocks is something to consider.
And to be fair, VFV isn’t a portfolio as much as it’s an index tracker.
But I’m 37 and feel behind so really wanted the lowest fee, highest potential (and risk) opportunity to make some of it back as I still have 30 years (ish) of growth ahead.
—-
What I did want to note Robb was that I’ve read over 100 of your articles (amazing and thank you) but never was prompted to subscribe to your newsletter while browsing on my phone.
I only saw the pop up to subscribe on my laptop.
Suspect I’m not the only one but just wanted to flag for your web person!
Hi Robb,
I am sold by your idea of owning VEQT in all my RIF, LIF, TFSA, RESP and Open accounts to simplify my investment portfolios.
One question I have is this:
How do you account for the CRA specified foreign property of C$100k in VEQT in the Open account since about 70% are foreign stocks. I am aware that this does not apply to registered accounts mentioned above.
Thanks,
Jeff
Hi Jeff, there is no requirement to file a T-1135 for any Canadian listed securities such as VEQT (or any Vanguard Canada ETF). This would be different if you held the US listed version (VT).