TFSAs have been around for what, 7 years now? I’m not about to check that, so you’ll just have to believe me. It’s not like it matters, I just thought I’d lead off this post with an interesting factoid about TFSAs, and we all know 89% of all interesting factoids are pulled out of the writer’s ass 42 seconds before clicking them out on some overpriced MacBook.
With that out of the way, let’s take a look at TFSAs. You all know what they’re about, but humor me as I spend a paragraph explaining them. You can contribute $5500 per year, raised from the previous maximum of $5000. Starting on January 1st, each Canadian has $31,000 worth of contribution room since the birth of the program. Any gains inside the account grow tax free, and unlike RRSPs you aren’t taxed on withdrawals when you take out the cash. Any withdrawals from your TFSA account can only be replaced the next year.
TFSAs sound like a pretty sweet deal, because they are. And yet, Canadians aren’t even getting close to using them to their full potential. According to the knower of all things – ex-MP and notable housing bear Garth Turner – a full 90% of Canadians don’t even know what investments you can hold in a TFSA, and 81% of people don’t even know the contribution limit. There’s a shroud of confusion surrounding TFSAs, even though they’re astonishingly simple products. I explained them in a single paragraph, for pete’s sake.
And yet, people still don’t get them. There are actual personal finance bloggers in Canada who continually suggest people stick their TFSA dollars in the bank. (at
ING Tangerine, naturally, because that particular bank makes all of your non-sexual dreams come true) The bank in question currently offers a “high interest” TFSA account that pays a staggeringly high… wait for it…
WHOA IF YOU GUYS NEED ME I’LL BE DEAD BECAUSE I JUST HAD 53 STRAIGHT ORGASMS BECAUSE I’M SO EXCITED.
Serious question: how many consecutive orgasms could you have before you died? People of science, drop everything and figure this out for me.
Sorry, back to the topic on hand. The S&P 500 was up some 30% in 2013, and that’s not even including the gain Canadian investors got because of our currency weakening against the American greenback. The TSX was up over 10%, not even including dividends, even after being weighed down by dogs like Blackberry and gold stocks. And yet there are still very few Canadians who are sticking their TFSA cash into the markets.
Opening a TFSA account is easy. Just scroll up to the top of the page, find the Questrade link, and head on over to Canada’s best online broker. Filling out the application form will only take a few minutes, and it’s easy to link your bank account with your Questrade account. It’s a snap, and yet the vast majority of Canadians don’t bother. Don’t be like the rest of those people.
Interest rates are at record lows, and 1.4% is a laughable return. Hell, the iShares Canadian Bond Universe (XBB) currently yields 3.32%, and that yield will go up over time as the ETF adds new bonds that are at a higher interest rate than the ones maturing. There’s even an argument that you should stick bonds into your TFSA since they’re taxed as income, and you’ll save tax on that part of your portfolio if you do it that way. As long as you’ve got equity exposure in your RRSP or regular accounts, I say knock yourself out.
I’d even say that traditional mutual funds are a better choice than sticking your TFSA into some account at a bank. And I think mutual funds are more evil than the spawn of Hitler and Flo from those Progressive Insurance commercials. Most online brokers offer investors free ETF trades, making mutual funds an unnecessary relic from times past. And yet they’re still better than 1.4%.
Imagine you had a badass muscle car, like a Ford Mustang. And then, instead of driving it like a badass, you drove 96km/hr and you got passed by the chip truck which is governed at 105km/hr. You’d get made fun of, and rightly so. Yet earning 1.4% is the same thing as driving a muscle car like a wuss. You don’t want to be made fun of by some guy in a chip truck, right?
Getting decent returns on your money is hard enough without intentionally sabotaging yourself. Don’t do that. Get your TFSA money into assets that will get you further ahead of 1.4%.