Lots of people will be making resolutions this week. Some will be kept, but, as we all know, most will not. Here’s a resolution that could be made every January with some confidence: to stuff as much money as you can into your TFSA. Every Canadian citizen gets new room on January 1. In January 2022 (i.e. in the next day or two), we’ll all be getting an additional $6,000 in TFSA contribution room. Every single Canadian man, woman and teenager over 18 will get the room no matter what their income is.
When first introduced, the room was modest and many felt the accounts were not much more than a nuisance. I remember doing an interview with Advisor’s Edge Magazine the day it was announced and I opined that while the idea was a good one, it wouldn’t make much of a difference for most Canadians. That is no longer the case. By now, the room accumulated by most adults is material enough that it should be seriously considered as a major part of almost anyone’s financial strategy. People who have been gaining TFSA room since inception have now accumulated a tidy sum of $81,500 in total TFSA contribution room. That’s the thing about TFSA room – it accumulates. Room that was once considered modest has now grown to be meaningful.
The other thing about TFSA contributions is that they are flexible. For accounting purposes, the federal government asks that people not contribute in any calendar year if they make a withdrawal that year. Still, since withdrawals are tax free – and since many people had a few investments that have done well over the past year and three quarters, the ‘tax-free’ feature is something you might want to take advantage of if you have a larger than usual purchase looming and you don’t want to go into debt or use financing options to finalize the purchase.
Building up TFSA accounts is a great idea for most people because of the flexibility the account offers. The money taken out could be used for:
- A house down payment (in addition to the first-time home buyer’s money from one’s RRSP)
- A car that you’d like to buy or student loan that needs to be repaid
- Absolutely any kind of consumer debt that is attracting a high interest rate
Remember that there’s a tax arbitrage game going on here. Most people with low incomes should maximize TFSAs even if they choose to forego RRSP contributions because the refunds they’d be getting for making RRSP contributions would be modest now and taxable down the road. High earners, in contrast, should look to maximize RRSPs first, since they’d generate a high tax refund and would be likely to be in a lower bracket in retirement when RRSP / RRIF withdrawals are made. Obviously, anyone who has the wherewithal should maximize both their RRSP and their TFSA if their cash flow allows for it. That means that a Canadian could legitimately shelter over $35,000 in combined programs (RRSP and TFSA) in 2022, so the incentives for taking personal responsibility for greater savings are certainly in place.
All told, while there are several resolutions you could be making this week, the one that almost everyone should make is to resolve to make a TFSA contribution. The last point I’ll underscore in this public service announcement plea is that contributing and investing are different things. RRSP contributions generate tax refunds even if the money is not used to buy anything. TFSA contributions only generate access to tax free capital down the road. There’s no immediate tax benefit. If you are like me and you’re worried that markets might be taking a significant tumble in the New Year, you can always resolve to contribute the money now as a sort of ‘best practice’ element of your overall financial lifestyle and simply leave the money in your TFSA as cash until there’s a sale on somewhere. Almost everything is expensive now. Saving should be an ongoing commitment. Investment decisions, on the other hand, can be made when there are good opportunities available at reasonable prices. Unlike with TFSAs, there’s no way to tell what might arise simply by looking at the calendar.
Here’s to a happy, healthy and prosperous 2022!