Know Your Limit, Invest Within It


The Canadian Federal government just announced their 2015 budget. Since it’s an election year in Canada, it was filled with extra goodies for Canadians to enjoy. One of the new changes that was put into effect immediately (yes, right away) was the increase of the annual TFSA contribution limit from $5 500 a year to $10 000. This means you can now go to the bank, or go online and deposit up to $10 000 this year without incurring any penalties.

The Tax Free Savings Account was designed for individual savers to invest their money and pay no taxes for any income gained in the account. The main difference between the TFSA and RRSP account is that the TFSA is invested with after-tax dollars, but it also meant that all gains regardless of how it was generated (dividends, interest, capital gains) become tax free. I’ve written about the benefits of using a TFSA and an RRSP account and even compared the two. For any individual Canadian that still has yet to open up a TFSA account, there should be no reason why you shouldn’t have one.

Doing It Wrong

walking_catThe TFSA account was meant to allow normal Canadians to literally cheat the tax system. Everyone I talk to hates taxes, yet when there is a tool that is available to make money without paying taxes, the majority do the dumb thing and just let the money sit there.

Remember the goal is to make your money work for you. This is why the TFSA is such an important tool to have. It lets your money your money grow without having the government touch any of the gains. Isn’t that amazing?

This means that money in the TFSA should not sit in GICs or interest bearing savings accounts. There is absolutely no reason to be so conservative if you are truly saving for the future. With the increased limits of the TFSA, people should not be thinking of them as glorified savings accounts or emergency funds. The increased funding has now made it a serious personal financial tool to build your wealth.

Invest! Invest! Invest!

After the increase, any individual that was 18 or over in 2009 now has contribution room of $40 500. That’s quite a lot of money to have in a TFSA. The goal is to invest that money in a diversified portfolio of stocks, bonds, real estate, preferred shares or any other financial instrument you can think of. The target is to make a diversified portfolio that is capable of generating an annual return of 7%. A 7% average return is not as ridiculous as you may think for a diversified portfolio over a long term period of 25 years. It just takes patience and dedication.

Imagine what a portfolio of $41 000 would become after 25 years at 7% growth per annum. Let’s take a calculator and figure it out:

$40 500 x (1 + 0.07)^25 = $219 811

So if someone has a fully contributed TFSA account and invested now and never saved nor put any more money in, he or she would end up with $218 811 in the account. That $178 311 worth of gains would never be taxed by the government. You would never have to declare any of that income to the government. If you love the feeling that you fleeced the government from tens of thousands of dollars in taxes then you will love investing in the TFSA account.

The best part of saving for your future in a TFSA is that you would be able to continue investing even after you retire and continue to reap the profits tax free. Imagine your portfolio continuing to grow after the 25 years and you retire while generating a 7% return. You would be able to get close to $14 000 in income on an annual basis completely tax free! That means you’ll have a monthly cash flow of over $1000 to go along with whatever benefits that the government might still give you.

Don’t Delay. Get In Today!

holding stop watchDespite the fact that the budget has yet to pass, the CRA has already issued a statement saying that the additional $4 500 can be made before the law passes. The likelihood of any failure on the Federal budget is next to none given that the Conservative government owns a majority in the house.

If you have topped up your TFSA already for the year and you have extra money lying around, it makes sense to put it into the TFSA right away. There is no benefit in waiting till the end of the year to add money into your TFSA. Just remember to continue balancing your portfolio with the new funds that you add to your TFSA.

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