Why haven’t you opened a TFSA?
October 6, 2009
The Government of Canada enacted the TFSA program starting in 2009 and yet my experience has been that very few Canadians have taken advantage of the program.
It would appear that there are several reasons for this and I would encourage all investors to consider the merits of the program. The lack of utilization has been a result of the economy, combined with some misunderstandings of how TFSA’s work.
Firstly, the economy has been soft in 2009 and many investors have been reluctant to add to investments. This includes normal cash accounts and RSP’s as well as this new type of account called a TFSA.
Secondly, there are many misunderstandings of what the program is and the pros and cons. Here are some of the more significant ones that I have come across.
- A TFSA is a savings account and rates are so low right now it does not make sense. This is not correct. A TFSA is a type of account and can hold any type of investment that is also eligible for RSP’s. This includes all manner of interest products (GIC’s, T-Bills, money markets and Bonds) as well as growth securties and dividend paying securities. All income and capital gains generated are tax free. In effect the name is a little misleading but the choices are very broad.
- A TFSA is going to complicate my tax return and/or affect my government benefits program (OAS<, GIS). This is not correct and the opposite is more the case. The money moved into a TFSA generates income that does not affect your tax return or the other programs and in fact, due to this, you actually may improve your situation on programs by deflecting income away from reporting.
- A TFSA is hard to setup and understand. Not correct. Paperwork is very straightfoward and simple. (click here to see the documentation) The rules are quite simple, you can put in $5000 per year, withdraw whenever you like for any purpose and can replace any withdrawn funds in the next year. That is virtually it.
- A TFSA can only invest in domestic assets. Again, not true. You can hold any number of alternative assets and be investing into almost any financial asset.
You owe it to yourself to take advantage of this program I remember years ago when RSP’s started and there was a lot of hesitancy. Over time the benefits became clearer and Canadians started using them. This will be the route of TFSA’s as well. Also, as we pass into the new year the new contribution will be another $5000. So up to $10000 in total. It becomes cumulative.
This also brings up another observation. We are a nation of procrastinators. I noted that once the rules changed on RSP’s years ago eliminating the “use it or lose it” aspect of contributions, Canadians stopped rushing in to make their contributions and most now have a large unused amoun, whereas they were trying to use the contributions every year before the change. As a result, the usage of RSP’s as investment device has been reduced, which is an unfortunate consequence.
What should be put into your TFSA?
This is an interesting question and there is a range of answers. The most conservative of investors likely want fixed rate returns, while a more aggressive investor would look for a growth product and potentially a very aggressive growth product. As well buying new issue product makes some sense to reduce or eliminate commission or transaction charges which would reduce the value of the account.
Want to learn more or have a question? ( Email me )
- Bruce
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