March 28, 2022

I also cover this in a YouTube video. Click here to watch!

What is a Tax-Free Savings Account (TFSA) and why should every Canadian citizen have one?

In this blog, I will give you all the necessary facts you need to consider so that you can make an informed decision about a TFSA for you and your adult family members.

Let me start out by saying – in my opinion – I think the government named the account incorrectly. It should have been called a Tax-Free Investment Account or TFIA because most Canadians are under the false impression that they can only have a TFSA at one of the major banks, all because of the word “Savings” in its name.

However, a TFSA is allowed to invest in almost anything, and I will share some ideas later in this blog on what I’m doing with my own TFSA in order to maximize my return by taking on additional risk.

So here is the history of the TFSA

It was first introduced in 2009 and you needed to be at least 18 years of age to open up a TFSA. Initially, you were only allowed to contribute $5,000 of after-tax money. This is key, because the money you are putting into the TFSA has already been taxed in your hands. Gradually, the annual contribution increased to $5,500, and then in 2015 – as a part of an election promise – the annual contribution was increased to $10,000. But, like most promises by politicians, once they got elected, they reduced it again to $5,500. Today the annual contribution sits at $6,000.

Now why is this important to you?

Because if you haven’t opened up a TFSA account yet, and you were at least 18 years of age or older in 2009, then you can put at least $75,500 into a TFSA today.

Each year a new contribution room is automatically created and if you forget or don’t have extra money to put into a TFSA for that particular year, then you get to carry that contribution room forward.

Now, it is very important that you don’t over-contribute to a TFSA. If you put too much into a TFSA, then Revenue Canada (the CRA), will charge you an interest penalty equal to 1% per month on your excess contribution. So be careful when calculating your contribution room.

I also advise you to be aware of this: if you take money out of your TFSA in, say, 2021, then you are only allowed to put that money back into your TFSA the following year – in this case, 2022. Because you were contributing “after-tax” dollars into the TFSA, when you take money out, it is completely tax-free money.

Think about it for a minute, if you were to contribute $6,000 per year for the next 25 years – and you received a conservative 5% net rate of return each year – then you would have a bucket of $300,000 in tax-free money. Plus, if you received a higher rate of return – say 7%, for example – then you would have a bucket of $406,000 in tax-free money.

Now, I did promise to tell you what my strategy is for my own TFSA… 

For background purposes, I will share with you that I have a high-risk tolerance – which means that I don’t look at my investment statements when the markets are down. I also don’t look at my investment statements when the markets are up. Why? Because whatever that number is, it is not my number. I am not planning on touching my TFSA for at least another ten or 15 years, so why would I be looking at the value today?

My TFSA is fully funded with shares of a private start-up company. If you research my background, you will know that I initially started my career in the Information Technology world of Corporate Canada before moving into the world of start-up software companies. 18 years ago I left that world to become a Financial Planner. In other words, I know the stats: only one in eight start-up companies survive. So for me, based on my risk profile, I am okay with those odds. 

I will tell you it has been over six years since my first round of financing, and I have since participated in three additional rounds of financing; the company I have invested in happens to now be cash flow positive, with plans to possibly go public in the next two to five years. 

For the record, I did not tell any of my clients about what I was doing with my TFSA, because it brings with it a higher level of risk than what most Canadians are looking for. So investing in start-up companies is not for everybody, but it’s absolutely something we can talk about. 

If you’d like to learn more about TFSAs, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

For the best life insurance advice and information, subscribe to my YouTube Channel and hit the notifications bell to be notified when we post new videos.  The channel allows me to share my passion for personal financial planning and I produce content that I would want to watch – and because of that, I promise to give you 110% effort in every video that I make.

By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

1 416 840 8544