Apr 29, 2019
TFSA’s – A tip off for the level of service you’re receiving
TFSA’s; from experience they are without a doubt the most misunderstood and misused financial tool available to Canadian investors.
Lets take a step back; the TFSA was introduced as an investment tool in 2009 in the midst of the US mortgage and housing crisis driven Recession, which naturally spilled over into Canada and the Canadian marketplace. The Feds of the time felt that an investment tool which allowed Canadians to invest in the markets – tax free would be a great way to inspire Canadians to get money back into the markets; driving prices back up, getting Canadians back on track for retirement and creating new jobs... an all around win for all.
But 10 years later people are still confused about them. It could come down to the name; Tax Free Savings* Account. It should have been called a Tax Free Investing Account. All to often I ask what people have their TFSA in only to find its in a High Interest Savings Account likely earning under 1%. This immediately begs the question; what are you saving tax on? Not to mention they aren’t even keeping up with inflation. If you want to save tax on gains, you need to actually have gains. So let’s talk about that.
Your TFSA most often should be used as a long-term planning piece. It can be invested in stocks, or mutual/seg fund portfolio’s matching your risk level. The majority of our clients have their TFSA’s in equity portfolios. Making it a long-term planning piece allows it to grow compounding tax free, and with time on your side before accessing it the investment can ride the ups and downs of the markets, allowing it to be the most aggressive investment you can handle. Leave the money you are saving for a trip in the spring for a regular savings account, this is not the place and just eats up room you could be using in a more productive manner.
Clients should also be aware of contribution limits. The maximum contribution limit in 2019 is $63,500 after citizens received an additional $6,000 of room for 2019. While it was more of a concern in early years when the room was smaller, using this account as a transaction account caused problems for many Canadian citizens. For example, when the room was only $5,000 if you put $5,000 in during January, then withdrew $2,000 in June and then re deposited the $2,000 in September you would have contributed $7,000 in the eyes of the CRA. The amount you withdrew would only have been taken into account in January of the next year, and you would then also get the new deposit room to use. You would have also payed a 1% penalty per month on the $2,000 over contribution for 4 months; a penalty of $80. Should you have been in a “high interest savings account” earning 1% you wouldn’t even have earned $50 that year. You’d actually have taken a loss on an investment with no risk. Not ideal. With the higher limit of $63,500 now the chance of this happening is certainly smaller, it’s still an example of why a TFSA should not be a transactional account.
While all clients risk tolerances vary, and their time lines vary, the TFSA is the best fit for the money you’re striving to earn the highest rate of return on. There’s no Tax. Ever. Let’s earn a decent rate of return to not pay tax on yeah?
This planning piece also tends to be a tip off to me on the kind of service or planning a client receives. If your TFSA is invested in a high interest savings account, just cash, or a GIC maybe you need to ask yourself if you need a second opinion. An advisor doing planning should quite frankly never allow this flaw to occur, and yet it happens all to often. There’s a big difference between someone paying attention and being an advisor and someone who holds a licence just doing transactions. If this is the first time you’ve heard this strategy on a TFSA, or the first time you knew it could be invested in something that can potentially achieve high rates of returns let’s have a chat. I’m sure there’s a lot of opportunity for you being untapped. Let’s tap into it.
April 29, 2019