The TFSA can seem like such an insignificant part of an investment portfolio. It was only introduced 13 years ago and the current max contribution is now only $6K a year.
But 13 years in, I’m now starting to see clients do big things with that money – a downpayment on a cottage, taking a sabbatical from work, renovating the kitchen, etc. There’s a lot that can be done with $127,000+.
And this is not from luck or speculation.
This is the result of consistency.
I know, I know, nobody wants to read about the glamour of good habits but sometimes it can be helpful to understand just where those habits could take you.
Here’s 4 key points to consider about the Tax Free Savings Account (TFSA):
- Where You Could Be in 13 Years (with regular contributions)
- Where To Start
- Managing Your Own TFSA – How Is It Really Going?
- Why Speculating Should Not Be Done Inside a TFSA
1. Where You Could Be in 13 Years
Using a rate of return over 13 years (156 months) of 7%, as well as a more generous estimate (10%), I’ve created the following table for illustrative purposes.
I’ve also shown the difference between monthly or annual contributions. Note that this is somewhat negligible over this time period.
| TFSA Assumptions | |||
|---|---|---|---|
| Annual contributions | 0 | $6,000 | 0 |
| Monthly Contribution | $500 | 0 | $500 |
| Years/months (13/156) | 156 months | 13 years | 156 months |
| Rate of Return | 7%/12 | 7% | 10%/12 |
| Present Value | 0 | 0 | 0 |
| Future Value | $127,404.28 | $129,302.93 | $160,299.84 |
*Note that the calculations are based on the assumption that contributions were made at the beginning of each month/year. *Past performance is no guarantee of future performance. The numbers used in this post are for illustrative purposes only.
2. Where To Start…
As with any good habit, the best way to start is to start.
Get started this month with automated monthly withdrawals or make a plan to contribute the full amount at one time. This is often a great strategy for those who are paid a lump sum bonus each year. If that’s the case, set yourself a calendar reminder when that time of year approaches.
That’s it!
This money, either $500/month of $6K for the year, can evaporate so easily. Spending it on dinners, clothes, cable packages, or other small purchases won’t have nearly the same positive impact as putting that money into a TFSA and letting it grow.
However, there is always a context. There may be other priorities for allocating that money right now, for instance, paying down your mortgage or personal debt, or keeping it in your corporation.
Working with a certified financial planner will help you evaluate the best strategies for where to direct your money.
At the end of the day, the habit of automatic investing/saving is what’s so powerful, even if contributing to your TFSA is not the optimal account for your situation.
It’s Not Too Late
You may not have been in the position to max out your contributions before now. Maybe you had other uses for your capital, buying a home for your family, building a business, or retaining your earnings in your corporation.
No matter what the reason, let’s look to the future and imagine where you could be 13 years from now.
A moderate rate of return from the example above would result in $127,404 13 years from now. For a couple that’s $254,808.
3. Managing Your Own TFSA – How Is It Really Going?
Are you managing your own TFSA with mixed success? Have you treated your TFSA account like an experiment or “play money”?
This is a good opportunity to compare your results to our benchmark.
The amounts are more than pocket change at this point.
Take a look at the chart above and compare your own rate of return and the current value.
If you’re doing well compared to our benchmark, then congrats and keep going. If not, it might be time to rethink your plan.
4. Why Speculating Should Not Be Done Inside a TFSA
Speculating is not the best approach inside a TFSA.
Why?
If you have a losing trade, you don’t get that room back ever AND you won’t get to use the capital losses to offset taxes elsewhere.
If you are going to speculate, do it in a regular investment account.
It’s often better to pay the capital gains taxes if you do speculate correctly than to risk losing a significant amount of investment capital in your TFSA.
Losses represent more than the loss, but also the opportunity cost of losing room for tax free growth in perpetuity.
More Than Just The TFSA…
I’ve got TFSAs on my mind because it’s a great place to invest money now that RRSP season has passed us and tax refunds and bonuses are coming in for some.
However, it’s also worth noting that financial success is most often the culmination of good, simple habits, like regular TFSA contributions, and a disciplined, diversified investment plan.
You don’t need to discover the next Apple or put all your money in Bitcoin.
Good habits and discipline is the most realistic and least stressful way to reach all your financial goals.