Hey, in this video
I am going to talk about FIVE mistakes
you might be making when it comes to
your Tax Free Savings Account.
We have lots to go over,
so let’s get started!
Hey! Welcome back!
This is Thomas
Here to help Canadians make better choices on
Retirement Wealth and Insurance
My goal is to make sure you can take
1 or 2 ideas home
And start making better financial decisions today
If you found this video valuable
consider subscribing so you will never miss any of my videos
Let’s jump into it!
TFSA is one of Canadian’s
favorite investment accounts
With nearly 15 million Canadians having one.
However,
not everyone in Canada knows
the account’s true potential
so in this video,
you’ll learn 5 common mistakes
Canadians make with their TFSA
The first mistake is an obvious one
You don’t have a TFSA!!
New data from the CRA has shown that
as of December 2018
There were 20,779,510 TFSAs but they are held by
14,691,280 unique TFSA holders
Keep in mind that,
there are 30 million Canadians who are 18 and above.
Meaning 1 in 2 Canadians do not have a TFSA.
Also,
when we add all the money in the TFSA together,
there are roughly $298 billion in the pool.
So If you do the math
This means that the average Canadian
with a TFSA of fair market value
Had $20,300 at the end of 2018.
Only 1 / 3 of the maximum contribution
In addition,
CRA also shared the demographic breakdown
by age and income of those who use TFSA
Interestingly
1/3 of TFSA holders are under the age of 40
28% between 40 and 65
And remaining are those over 65.
I’m a firm believer to start saving at a young age
So this stat is particularly nice to see because
younger Canadians are thinking about this!
Now you might think,
I don’t have a ton of income to start saving yet
So can’t I just start later?
CRA also shared the breakdown of income levels
52% of TFSA holders made
under $50,000 in their total income
Which is slightly lower than
the Canadian average income
The average TFSA balance at December 31, 2018
was $20,300
for those TFSA holders with income
from $20,000 to $90,000.
Of course,
those who had higher income levels had
higher average TFSA balances
With $90,000 to $250,000 income brackets
holding $27,000 TFSA balance
And those over $250,000 income
with $43,300 in their TFSA
If you don’t have a TFSA,
think about how you could contribute little by little
And maybe even through automatic payroll deductions
However,
there are situations where
I wouldn’t recommend a TFSA
And I’ll talk about later in this video
The second mistake Canadians make with TFSA
is assuming it is only a savings account
Instead of seeing it as an investment account
Just because of its name!
Your TFSA holds your savings
but it can also hold equities like
Stocks, GICs, bonds, ETFS or mutual funds
And when you have those investments inside your TFSA,
Your investments grow tax free.
If you only use your TFSA for savings,
then you are actually losing
value of your money over time
For example,
the current saving rate in the banks
can be as low as 0.1% per year
In 2021,
we are seeing a 1.6% inflation
and in 2022,
1.8% inflation
therefore,
in the real return,
you are actually down 1.5% this year
and 1.7% next year!
Keep in mind these inflation rates are a result
of the current state with the pandemic too
So inflation can be higher which means
the value of money will decrease even more
With this low interest environment,
unfortunately we do have to take some risk now
by investing into the market.
Now if you treated your TFSA as an investment instead
Either with a balance or growth portfolio
You should see a 3-5% per year return in average
or higher if you hold it longer
While these aren’t guaranteed,
you can see chances are it will be higher
Compared to using it as a savings account
With this in mind, the TFSA should actually be called
the Tax Free Savings & Investment Account
don’t you think?
Hey Thomas, no problem,
I like to invest in stock.
And I plan to become a day trader in one day.
If you’re a pro with investing with your TFSA
And think you can get away with
day trading in your TFSA
Think again!
The CRA will audit so you don’t want to get
a large penalty from doing this
What I meant is,
TFSA do not allow you to
take money in and out too frequently
While there are no guidelines to this
The CRA does say that a TFSA is meant as
a savings and investment account for Canadians,
Not for traders to profit from it
I do see a few friends of mine
got a warning letter because of that.
So watch out!
The third mistake many Canadians make with their TFSA
is over contributing
The contribution room for TFSA in 2021 is $6000
And this is the same limit for every Canadian,
regardless of your income level
And with the $6,000 addition,
the total cumulative contribution limit
For someone who has been a resident of Canada
And is at least 18 years old
since TFSA began in 2009 is $75,500!
You carry forward any unused TFSA room
you haven’t used in previous years
However, you also can go over your limit
Usually because of two reasons.
One being
you are too young to entitle all the TFSA room.
For example,
if I was 18 years old in 2009,
then up until today,
I will have $75,500 of tfsa contribution room.
Vs If I am born the year of 2000.
Which now I am 21 years old.
Then I only have $23,500 of tfsa contribution room.
Did you know in that
of the 15 million Canadians who have a TFSA
8.5 million of them contributed to their TFSAs in 2018
1.4 million contributed their max entitled amount
With the average contribution being $7,811
compared to the max TFSA in 2018 being $5,550
This means a lot of Canadians
were catching up from previous years
So while for most,
you might have a lot of room from previous years
But if you don’t,
you can accidentally go over your limit
with this mistake
Wondering what happens if you go over?
You will have a penalty tax of 1% per month
For example, if you contribute $2000 over your limit
You will have to pay $20 every month
as long as you are over in your TFSA
To check your limit,
you can log into your CRA account online
And there is a section where it shows your contribution
It might not reflect your contributions or withdrawals
from the current year
So you’ll need to remember if you’ve done any!
Another way to check is to call the CRA and
they can provide you with the information
The other reason which is the fourth mistake with TFSA
Is withdrawing and contributing to your TFSA in the same year
Going back to mistake #3,
this is actually the easiest way Canadians overcontribute!
For example,
you have $6000 limit this year
so you contribute all $6000
Later,
you decide you need to take out $3000
to purchase something
So you think,
I should still have $3000 remaining for the year
But this is wrong
Withdrawals will only be added back to your
contribution room at the beginning of the next year
If the limit next year is also $6000
then you should have a total room of $9000
If you did add $3000 back in the same year
You will now be $3000 over in your TFSA
And at 1% penalty tax,
you’ll be paying $30 a month
Side note:
you always want to withdraw your TFSA
when you are positive on your investment.
For example:
say you max out your TFSA, $75,500.
And now the market value is at $90,000
And you withdraw everything.
Next year.
You can put back the full $90,000
plus the new additional $6,000.
Which means you room is now $96,000
which is higher compare to the others
And the last mistake I see as a financial consultant
when it comes to TFSA
Is not looking at your finances as a whole!
This is why it’s a good thing to find
a professional to look at all of your finances
So they can help you make the most of your money
I’ve seen clients contribute to TFSA
even though they have large credit card debts
Credit cards have high interest rates
- usually 20% or more!
And even If you’re investing
with your TFSA earning 3-5% per year
The money would be better off
if you paid off your debt first
Or in another situation,
you have a very good income.
which also means you have to
pay a lot of income taxes.
So,
putting into the RRSP first might be better off.
Because now
you might be able to generate a tax return.
Then you put the tax return into your TFSA
to further boost your saving
So,
how many of these mistakes you had made before?
Leave a Comment below!
Don’t worry,
We’ve all done it
But hopefully this video clears up
the common ones I see often!
And if you know anyone that is
going to open a TFSA soon,
please send them this video.
So they can shorten their learning curve
Hey! Thanks so much for watching!
This is Thomas
and I’ll see you in the next video!