If a tax-free savings account (TFSA) were to be personified, you could do worse than paying homage to the Sad Cat Diary on YouTube, which gives a humorous voice to our feline friends. There is a similar one for dogs. I highly recommend finding the videos and watching them, but first let’s hear from our friend, the TFSA.
Dear Diary: I am a small tax savings vehicle for Canadian residents and was born in 2009. My potential is underestimated by many. My owner could have contributed to me each year, but often left me starving for attention. I think they may not have sought advice on how to best raise me, but the good news is that it’s likely not too late.
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Dear Diary: My contribution room doesn’t go away if not used, which is a wonderful thing. My maximum contribution room to the year 2021 is $75,500. This means, if my owner fed me as much as I could handle each year, they could have given me $75,500 to cultivate.
Dear Diary: By cultivate, I mean invest and grow tax sheltered, or super-fertilized, as I like to describe it. The tax-free benefit is so very appealing, but often taken too lightly. Although the contribution room has varied throughout the years, for a simple illustration of my potential, I am going to assume that my owner has contributed equal amounts of approximately $5,807 each year since 2009. I’m also going to assume my owner would have invested the money in a balanced asset allocation and has a medium-risk investor profile, which historically has given returns of 6.8 per cent annualized over a 10-year time period (a not unreasonable assumption given the available research). For 13 years, my owner gave me $5,807 and our adviser invested these monies in a balanced portfolio, which earned, on average, 6.8 per cent compounded.
Dear Diary: The calculation is in. Do you know how big I would be today? I would be approximately $115,452 … which means I would have grown $39,952 and my owner would owe zero taxes on this growth … wow!
Dear Diary: I am also so very flexible. I can be both an emergency fund as well as a long-term investment account. No taxes are paid when my owner withdraws money from me, and they can return it to me in a future calendar year without impacting my contribution room. Whereas if my owner withdraws from their registered retirement savings plan (RRSP), they must pay taxes on the withdrawal and they lose that contribution room.
Dear Diary: Don’t get me wrong, the RRSP is a worthy competitor, an important savings vehicle not to be ignored or taken for granted. We actually play very well together in the financial sandbox and our features complement each other. My owner should consult an adviser to determine whether to give to me, or their RRSP, or both. How much income my owner is earning and how much cash surplus they have are important considerations, but often overlooked without advice.
Dear Diary: The power of an RRSP lies in the tax deduction today, and the benefit of tax-deferred growth. My owner gets a tax-break today when they contribute to their RRSP and are delaying the tax bill on these monies. They are taxed when they later withdraw from the RRSP, but I digress. Let’s get back to more about me.
Dear Diary: Although I don’t like to think about this, my owner will not live forever and may want to ensure that a spouse or beneficiary is named so my value can easily be passed to the right person or charity without going through their estate.
Dear Diary: I have good news to report. My owner has decided to seek advice from a professional and I am sure my tummy will soon be full and that I will grow to be a strong part of my owner’s financial portfolio.
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