Today I want to talk to you guys about one of the most misunderstood
but also one of the greatest tools available to Canadians as far as financial planning
is concerned.
The Tax Free Savings Account, otherwise known as the TFSA
Now I feel that this is basically mostly misused, because it was so improperly named.
In my opinion the TFSA was the fourth worst named product or thing in the history of the
world
behind these three things: First of all is, Tastes Like Grandma Raspberry Jam,
Second is whatever the hell this kind of dip is?
And last but not least is this poor guy.
I mean what kind of parent with the last name Pusey, would name their kid Lucious?
That's just ridiculous.
Now why do I think the TFSA is improperly named?
I remember in 2009 when I first heard about the TFSA, somebody was like, look, you don't
have to pay taxes
on the money in your savings account.
And I was like, "Big deal man, I've got like $100 in my savings account."
And I am pretty sure I owed like 10 cents in tax on that last year.
I think I'll survive if I don't have to pay that.
Like whoop-dee-doo.
And that was until I actually understood what it was for and what it could do?
And what it should have been called.
It should have been called the Tax Free Investment Account
TFSAs are meant for investing in my opinion and they are absolutely incredible.
Now that's sort of where banks tend to trick customers into doing the wrong thing with
their TFSAs.
So here I am going to give you an example of what happens.
I know they entice people to come in, because they say they get a good introductory interest
rate.
If they open a TFSA.
So I am going to use and example of a 40 year old man or woman.
who makes a good income and has quite a bit of savings but has never opened up a TFSA.
Currently they have $46,500 worth of room in their TFSA and every January 1st, that
is going to go up by $5,500.
So if this 40 year old man or woman goes into a bank and they tell them to open one of these
accounts,
and then they say, look we are going to give you this great interest rate of 1%, if you're
lucky, on your money.
and now just keep adding to that and see what happens.
Just keep doing that every year until you retire, so you do that for 25 years and look
at how amazing that was
at the end of the day.
You just turned your $184,000 investment into $216,000
Congratulations!!
You just made $32,000 TAX FREE.
In 25 years.
I mean that's brutal.
That's not what it's meant to be for whatsoever in my opinion.
So now I am going to do another example and instead of leaving it in cash, which is generating
a low interest rate
we are going to invest inside your tax free savings account and see what happens.
Now I am going to use a projection of 5.5% pretty much every time I give you an equity
based
number.
I feel that that's a conservative estimate for what you should get if you have a proper
portfolio.
but I also feel that financial planners should er on the side of caution not to get their
clients excited
or to promise you something that you might not get.
so I am going to use 5.5% and we're going to look at this exact same person and see
what happens.
Over the course of 25 years, they turn that $184,000 investment into $474,000
Now they just made $290,000 completely tax free.
That they can now take out every year as part of their retirement income tax free.
So that turns into about $37,000 tax free a year from 65 to 85
In comparison to the last example, when you weren't even being able to pull out $12,000
a year.
So I mean, that's a huge difference.
It's great tax-free money that you can make.
And you can use in your retirement plan.
I know a lot of you are saying, "well whatever Kent, I don't have that kind of money, i can't
put that kind of money away."
That's fine, I get that.
That is a lot of money for the average person to save and most people can't do that.
So now let's just pretend that you're a 25 year old man and you can find a way to put
away $2,000 a year
for 40 years until you turn 65.
And just see what happens.
It doesn't seem like that much, but you just turned that $80,000 investment into more than
$300,000.
So that $2,000 you invested a year, turns into about $22,000 tax free in retirement
income
for 20 years coming out.
So look how good that is for a little bit of an investment.
Please stop using your Tax Free Savings Account like a typical savings account.
That's not what it's meant for, and uh.
Keep watching.
Thanks.