Investment Account Series: The TFSA

As part of this series, I want to delve into the three main types of accounts that most Canadians will be using to save money for the future. Of course many Canadians choose not to save at all, instead focusing on buying a super-expensive house and struggling to pay the mortgage and home ownership costs. But at The Rich Moose we're different!

If there's anything I have learned over the years, nothing—not even sacred home ownership—replaces proper saving in retirement accounts. Sorry folks, your house will not pay for dentures, vitamin D vacations, and Depends!

Disciplined investing in retirement accounts helps you accumulate wealth through the power of compounding interest.

There are three primary accounts that Canadians can use to save for the future:

  1. TFSA
  2. RRSP
  3. Cash/Margin

For the first post of the series, I will dive into the Tax Free Savings Account (TFSA) because it's the best place for the majority of Canadians to save for retirement. I naturally would prefer we call it the Tax Free Retirement Account, but you just can't help politicians and the big banks so TFSA it is.

The TFSA is the most misused retirement account without a doubt. Instead of using TFSAs to their full potential, the vast majority of Canadians who have actually bothered to open a magical TFSA just plunk their money into a big bank TFSA which acts like a Not-So-High Interest Savings Account. Current interest rates are a phenomenal 0.5%. If you were 18 in 2009 (when the TFSA was introduced), you can contribute a cumulative total of $52,000 in 2017. Your interest on that for 2017 will be a pitiful total of $260.

What most Canadians don't know is they can actually use their TFSA to invest in anything that you could buy within your RRSP. The TFSA is a vehicle for investments, not a product in itself. If you open a TFSA with Questrade (like I do), and invested in ETFs following a standard growth portfolio of 80% stocks and 20% bonds in 2016 (when you could have a contributed total of $46,500), you would have earned $5,800 in tax-free investment returns last year.

The true magic of the TFSA comes with time and compounding interest. In fact, if you simply max out your TFSA every year from the time you're 18 until 65, you could amass a truly amazing amount of completely tax-free wealth which could generate a nice amount of tax-free, non-reportable income.

Let's assume the TFSA continues to be simply adjusted for inflation and you will turn 18 in 2017. By investing in a passive Growth Portfolio every year, which should generate an inflation-adjusted return of around 6% annually, you could have approximately $1,400,000 in your TFSA when you are 65 years old.

In retirement withdrawing 5% of the portfolio each year, you could take out up to $70,000 per year tax-free. Multiplied by two for a couple and you could have a truly luxurious tax-free retirement!

Once you have a self-directed TFSA account open, all you need to save is $105.75 per week to max out your TFSA this year! Maxing out your TFSA should be your first financial priority each year and it's never too late to start.

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