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Is Your TFSA Not Looking Too Good?

Probably more misunderstood than Taylor Swift’s “Starbuck’s Lovers” lyrics, the TFSA account has had its reputation dragged through the mud the past couple of years. Ever since the Trudeau Liberals went on a crusade to bash the TFSA as a rich man’s tool to get rich quicker, the TFSA has been swept under the rug by many Canadians. The most recent statistics from StatsCan shows that the average Canadian has $17,285 contributed to their TFSA. Considering that the maximum limit for contributions is $63,500, for Canadians that were eligible since 2009, the TFSA is not looking too good.

This trend isn’t just for the poor and low income earners. It’s the same even for high income earners.

TFSA usage by age group

Looking at Canadians overall, only 40% of individual contribute to their TFSAs. Even for those that make over $100,000 only around 50% of the individuals use their TFSAs. When people reach higher income brackets, they tend to favour the RRSP account more. That’s because the RRSPs can be used to defer taxes on income into the retirement years where tax rates are lower. This benefits the rich much more than the poor. Tsk tsk Mr. Trudeau. You’ve been spreading lies.

Using For All The Wrong Reasons

When we look at what the 40% of Canadians are doing with their TFSA accounts it’s even more concerning. Statistics from the CRA show that many Canadians are actually using the TFSA accounts as simple savings accounts. This is more evident when we look at the withdrawal statistics for the TFSA account.

tfsa contributions and withdrawals

Even though people are contributing to their TFSA, there are also large withdrawals from it. Looking at the age groups between 20 and 49, the statistics show that over 50% of the money that is put in during the year is actually taken back out. That means the net amount that stays in the TFSA is actually less than half.

Young Canadians under 35 seem to be raiding their TFSAs more than any other age group. The fact that almost 70% of the money put into the TFSA is taken back out tells the tale that many need their TFSA money for day to day expenditures. This is probably because of high housing costs, repayment of student loans and high credit card debt. What most of these young Canadians aren’t realizing is that they are losing out on many years of compound tax free growth. Something they will never get back.

What You’re Missing Out On

The best strategy to employ with the TFSA is to invest using a balanced portfolio for the long term. Where many Canadians are failing right now is that they are treating it like a glorified chequing account. That’s the wrong way to use your TFSA.

The advantage of the TFSA is that all gains are tax free. Any money earned in a TFSA is exempt of taxes because taxes were already paid on the money that was used as the contribution. Unlike the RRSP account, when money is withdrawn from the account there are also no taxes to be paid on the withdrawal.

That’s why the government doesn’t want you to invest using the TFSA. It keeps money earned away from their pockets. All of the negative publicity against this gold mine was to keep the general public uneducated. It’s a good thing that you found this blog and now you know the truth.

One of my favourite balanced investment portfolios to follow is the simple Canadian Couch Potato portfolios. I always hear many people say that investing is too complicated and they don’t understand it, but for someone that’s a novice investor, the Couch Potato model portfolios provide a simple one stop shop: The Tangerine Investment Funds.

It’s true that the MER on these funds are higher, but they are simple to setup and use. Just deposit money into the account and you’re set. It works almost like a chequing account, but rather than just collecting interest it maintains a balanced investment portfolio.

Since the advent of the TFSA account a balanced portfolio using the Tangerine funds would have done quite well. In fact, it has averaged 6.58% in annual growth per year. I’m much more conservative with my projections and my long term aspirations of gaining 5% a year in a conservative portfolio seem really good. But for most Canadians, the simple returns of the Tangerine Funds far exceeds the average Canadian. That’s because most Canadians are just receiving simple GIC interest or High Interest Savings payments.

So just what might the differences be between someone investing in a GIC and someone investing using a balanced portfolio:


The difference in gains is quite significant. Already after a decade, someone that has invested using a simple Tangerine Fund have $21,000 more than the person investing in a GIC. As the time frame gets longer and longer the disparity becomes that much larger.

Even using a 5% conservative figure yields a large difference. Most people feel getting gains in excess of a GIC return (2.5%) to be impossible or extremely risky, but 5% is indeed very conservative when bonds are already returning around 3%. Even if losses were to occur from the existing heights of the market, and the long term range falls to the 5% growth, the positives still outweigh the negatives.

Certainly future gains don’t always reflect historical figures, but in the long run the market has been pretty consistent. For someone that can be even somewhat optimistic about the world economy, growth can continue.

Changing Bad Habits

There are a few things that Canadians should improve on when it comes to their TFSA accounts.

  • Stop thinking the TFSA as an account for the rich. Just like how Questrade has been advertising about high fees, people need education to realize the TFSA is not for the rich. The RRSP account is for the rich. Shut Mr. Trudeau up please!
  • Stop using the TFSA as a chequing account. Treat your TFSA as a long term investing account and try to let it grow over time. Everyone, and I mean everyone, can create a million dollar investment portfolio over the course of their working career by simply finding a way to save $500 a month. After 40 years of compound growth in a balanced investment portfolio, the TFSA could easily become a $1 million dollar portfolio that could give you $40,000 of tax free income a year. That’s over $3,000 of passive income a month tax free!
  • Use your TFSA for growth assets. Don’t hold GICs and or have it in a high interest savings account. This defeats the purpose of using the TFSA as a tax free investment vehicle. Remember that the TFSA is just an account. Think of it like a shopping cart at the grocery store. There are many different types of things you can put into your shopping cart. There are all sorts of investments that can go into your TFSA that can earn more than just 2%. Think balanced portfolio.
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  1. The Veteran Spouse
    The Veteran Spouse February 10, 2019

    At least Canadians are putting money into their retirement accounts. Most Americans are not using these types of accounts. I do get your point though, if Canadians want a savings account, TFSA are not it. Some kind of savings account would be better suited for that. I hope I’m correct in my understanding of TFSA. Thank you for Justin Bieber by the way.

    • bkwan
      bkwan February 10, 2019

      Interestingly since the 2008 housing crash, Americans have been diligently saving much more of their income on average than Canadians. I really cannot comment on the use of Roths and 401K accounts as I haven’t researched on the statistics of their usage. Canadians tend to use these registered accounts, but they get raided for buying homes or taking vacations. Unfortunately they aren’t used for long term savings.

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