All posts by Financial Independence Hub

How to use your TFSA account

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By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

It’s the new year and you may have a couple of questions on how to use your TFSA account. The Tax Free Savings Account is one of the greatest additions to your investor tool kit. It is true to its name in that the monies grow completely tax free. When you take the monies out for spending there are no tax implications. We need only keep track of our contribution limits.

Out of the gate it’s important to know the contribution allowances. The program was launched in 2009 (the brainchild of then federal Finance Minister Jim Flaherty). The initial contribution limit was $5,000. There is also an inflation adjustment mechanism and that is why you will see the TFSA limits increase over time.

TFFA Limits History

  • The annual TFSA dollar limit for the years 2009 to 2012 was $5,000.
  • The annual TFSA dollar limit for the years 2013 and 2014 was $5,500.
  • The annual TFSA dollar limit for the year 2015 was $10,000.
  • The annual TFSA dollar limit for the year 2016 and 2018 was $5,500.
  • The annual TFSA dollar limit for the year 2019 was $6,000.
  • The annual TFSA dollar limit for the year 2020 was $6,000.
  • The annual TFSA dollar limit for the year 2021 is $6,000.

The total contribution allowance to date is $75,500 for 2021. You can carry forward any unused contribution space. Keep in mind that the eligibility for TFSA is based on age of majority. You would have had to have been 18 years of age or older in 2009 to qualify for that full amount. You would also have to be in possession of a Social Insurance card/number.

If you reached age of majority in 2018, that would be your first year of eligibility. To date your contribution limit would be …

Starting the TFSA in 2018

2018 – $5,500, 2019 – $6000, 2020 – $6,000, 2021 – $6,000 for a total of $23,500.

Of course we have to wait for January 1 or later to use that $6,000 for 2021.

Remember if you go over, you will be penalized by 1% per month, for the amount that you have overcontributed. Check with CRA for your contribution eligibility.

Reader question on over contribution

“Ooops, I over contributed in December of 2020.” If you recently jumped the gun and overcontributed by $6000 you would be charged 1% per month, meaning a $60 penalty. Thing is you earned another $6,000 in contribution space on January 1, 2021. You would only face one month of over contribution. You might as well sit tight. You would not be able to have that contribution reversed, even if you quickly move that money out of the TFSA account. If you move the monies in and out there will be no benefit, but you could created fees if it is stocks or ETFs.

If you ever make a more costly (but honest) mistake on over contribution, you can take that up with CRA and your financial institution. It’s possible that you might get some help from your institution or from the CRA. Good luck.

Calculating your TFSA after removing amounts

The formula or rule is quite simple. If you remove $12,000 in one year, you would add that full amount to next year’s contribution allowance. And of course that contribution allowance would also include that calendar year’s new room. For example if you took out $12,000 in calendar year 2020, you would add that $12,000 to the $6,000 allowance for 2021. Your 2021 contribution allowance would be $18,000.

Yes, you get to keep any contribution room gains you made in your TFSA if you sell. You lock in that space. Those investment gains can boost your total TFSA contribution room above the calendar year totals.

This event may be considered if you were looking to use or gift some monies next year. You might sell now and lock in that TFSA space. Obviously, if you’ve been investing those monies, your account is likely or should be at an all-time high.

Please note that if it is a stock or bond or ETF or mutual fund, the trade has to settle within the calendar year. Check with your discount brokerage or advisor on timing and settlement details.

Saving or Investing for your TFSA?

I am a big fan of using your TFSA for investing. There’s the potential or likelihood of much greater gains and hence much greater tax savings when you invest your TFSA dollars.

Also consider that interest rates are sooooo low you might have very modest ‘gains’ with any savings account. The benefit of the TFSA for savings is more muted in a low interest rate environment.

But of course, 2020 proved to many the importance of that emergency fund. You might hold an emergency fund that is 6 months of total spending needs as a starting point. Here’s my personal finance book, OK it’s a blog post …

Oh look, I just found $888,000 in your coffee.

And it can make sense to hold some cash as a portfolio asset. After all it’s an obvious hedge for any deflationary environment. The spending power of cash will increase in any deflationary period.

On that cash front you might consider EQ Bank where you can earn 1.5% in a savings account and 2.3% in registered account such as that TFSA. You may choose to hold some TFSA amounts in savings and some in higher growth investments.

On the investment front you might consider a one-ticket (all in one) ETF portfolio such as those from Horizons, iShares, BMO Smartfolio, Vanguard or the TD One Click Portfolios.

You may decide to build your own ETF Portfolio.

On the mutual fund front you might have a read of this post from Jonathan Chevreau on the top mutual funds in Canada. I am a big fan of those funds from Mawer.

Beneficiary form – successor holder

Ensure that you fill out a beneficiary form for all of your registered accounts. For taxable accounts you might consider joint accounts. Continue Reading…

Lessons we learned in 2020

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By Akaisha Kaderli, RetireEarlyLifestyle.com

Special to the Financial Independence Hub

“Improvise, Adapt, and Overcome” – Marine slogan

What a year!

We have heard from friends and family how happy they are to see the year 2020 in their rearview mirror. Can’t argue with that. Yet, in my opinion, 2020 brought us great lessons, from which we can benefit.

Solid plans often break

Often our Readers will say they have just a few more things to settle, a few more “I’s” to dot and “T’s” to cross before retiring. They’re waiting for the health care issue to be settled, waiting for the bonus check next year, waiting to hit “this” particular financial number, waiting for next year to sell their properties … they’re waiting …

Personal Financial Independence was put off until this imaginary perfect time, and then finally, for 2020 they planned a year of travel. But BAM! COVID broke out or, in some cases, one of the spouses became gravely ill with a disease and that not only shook them up but forced them to shelve all excursion plans.

Ask yourself, “What are you waiting for and why?” Then ask yourself if you have a Plan B for these unexpected situations.

Lots of people wait until they graduate from law school or get the degree or wait until they get married, or until they buy that perfect house, or until they hit that magic number to retire: in order to be happy.

They live for tomorrow and forget all about the pleasures and happiness of today.

Stop settling, start living. NOW.

You’re not going to get anything in Life by playing it safe. There are no guarantees.

Lesson learned: Faith over Fear, Don’t Worry be Happy

We only have control of ourselves.

I  get push back on this one, sometimes. Usually it falls under the “You don’t understand” category.

But if you think about it, stuff happens.

We can’t control a loved one getting ill, can’t control that our children or spouse don’t do what we prefer. We don’t have a lot of say in international peace relations. Whether our children get divorced, COVID breaks out, there’s a huge business loss or politics don’t go our way – all we have control over – is our response to the situation.

If you are feeling out of control on your moods, get help. There are lots of tools to clarify your mind and calm yourself down and lots of services available to you. Don’t let the stress build up until you have an even worse situation happen.

Lesson Learned; Life is not in our total control: only our response to it is.

Relationships change

Relationships were cemented or lost this year. Yeah, this was a big one.

Once again if you think about it, when you got married, had a child, moved cross-country, got that promotion, contracted a serious illness, got divorced, retired early or hit any other life milestone, did some friendships recede?

Most likely.

Life is change and sometimes your better future lies ahead of you, without those loved people in them.

Yes, it IS difficult to let go of habits and people. We’ve all been there at different points in our lives. It’s better to process the loss and continue to move forward, creating the life of our dreams, than to become bitter and angry over the loss.

In my opinion, 2020 was a year of clarification.

What I mean is, yup. Things fall away. Sometimes beloved things and people. I think this helps us to focus on what really matters to us. This is a blessing in disguise and you will be stronger for it.

Lesson Learned; As you grow, some relationships won’t make it into your future.

Fear seemed ever-present

When we are afraid of something, chances are, we don’t know much about it. Our perceptions are skewed because of this.

Remember the old saying: FEAR is False Evidence Appearing Real?

Take control and choose to find out more. The knowledge you discover will give you options and open up doors for you. Question the thoughts you are thinking and the beliefs you are holding. Fear does not serve you in any way and will only force you to contract, limiting your options even further.

This is a choice. Continue Reading…

A good resolution for 2021: Choose Financial Independence

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By Michael J. Wiener

Special to the Financial Independence Hub

Many of us dream of financial independence.  Chris Mamula, Brad Barrett, and Jonathan Mendonsa offer many practical ideas for achieving financial independence (FI) and enjoying the journey along the way in their book Choose FI: Your Blueprint to Financial Independence.  They avoid many of the problems we see in the FIRE (Financial Independence Retire Early) book category.

The authors avoid the biggest problem with most FIRE books.  It’s annoying to tell the story of a high-income earner deciding to live like a student his whole life and retire in his 30s, and then say “you can too!”  Although I point out the bad parts of books, I can forgive a lot if my mind is opened to a good idea.  For this reason, I’ve enjoyed FIRE books even if they have some bad parts.  This book manages to avoid the worst parts of other FIRE books.

The authors don’t bother much with retirement.  FI gives us choices so we can “scrap the idea of retirement completely and focus on building lives we don’t want to retire from.”  The life you build can involve paid work, leisure, or any other pursuit you want.

Rather than focus on just one story, the authors draw from the experience of many people who have sought FI.  A common theme is the importance of enjoying the journey.  If you see your pursuit of FI as suffering for several years until you hit your magic number, you’re not doing it the right way.

FI’s benefits start even before you reach the target

You benefit from pursuing FI even before you reach your target.  “If you have a mortgage, a couple car payments, a family to feed, and nothing in the bank, what choice do you have when your boss asks you to do something stupid?”  I was able to push back somewhat with my boss in the late part of my career, and this got me more money and autonomy.

If reaching FI seems like an unattainable goal, it may help to break it down into milestones.  The authors suggest “getting to zero” for those in debt, “fully funded emergency fund,” “hitting six figures” in your portfolio, “half FI,” “getting close,” “FI,” and “FI with cushion.”  This last stage is defined as having a portfolio equal to 33 times your annual spending needs.  This is a sensible target for a young person with a long remaining life who doesn’t really know how spending needs will change with age. Continue Reading…

A smart guide on how to invest in 2021

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By Alex Barrow

Special to the Financial Independence Hub

2020 was a difficult year in markets and the economy. There remains a high level of uncertainty heading into the new year. Below we’re going to walk you through some time-tested practical steps on how to prepare for the coming year, in order to make sure you’re financially set for whatever may unfold. 

1.) Assess your personal balance sheet

When planning your finances for the new year it is critically important to know and understand the strength of your current financial position. You can do this by running through the exercises below. 

• Understand your financial obligations relative to your income: 

Are you carrying high levels of debt relative to income? What is the composition of this debt: is it mostly in high-interest credit cards or a low fixed-rate mortgage? The 36% Rule states that your debt to income (DTI) should never surpass 36%. When your DTI rises above 36%, your personal balance sheet is fragile and you become more exposed to financial risk. In these difficult times of uncertainty, it’s important to keep your DTI low so as to maintain financial flexibility. 

• Upcoming big-ticket expenses: 

Do you plan to make any big purchases or financial outlays in the coming year? Perhaps you’re planning to buy a home and purchase a new car or pay the tuition for your child to attend their first year of college … These are big expenses that can stress the strongest of personal balance sheets if one doesn’t plan properly. That’s why it’s important to note these at the start of the year so you can start preparing for the expense. 

  • Nonessential spending: 

Frequent dinners out and vacations at the beach are fun but if they come at the cost of putting a strain on your financial security, they can cause more stress than they’re worth. A good exercise for planning for the coming year is to look back at your expenses from the year before and see where you’re maybe spending a little more money than you’d like. Those $6 lattes every morning add up! 

2.) Set your personal financial goals 

To cite the oft-quoted baseball sage, Yogi Berra “If you don’t know where you’re going, you’ll end up someplace else.” Financial planning and goal setting are critically important to protecting your resources and securing the future you want. From a practical standpoint, this means doing a number of key things at the start of each year. 

  • Set a target retirement savings amount: 

Retirement might be a ways off for you, or not. Regardless, it’s never too early or too late to start planning for it. The rule of thumb is that you should aim to stash 10%-15% of your pretax income into a retirement savings account each year. The earlier you can start doing this the better because that puts the power of compounding in your favor.  

  • Invest, invest, invest: 

The best way to grow your wealth over time is to start investing early and often. This means putting a percentage of your income into low-cost stock and bond indices, on a consistent and regular basis.  

  • Take control of your debts: 

Turning back to keeping your DTI below the key 36%, debt is a financial burden that has to be dealt with before it grows out of hand. This takes time and planning. Just like how the power of compounding works in your favor in investing, it works against you when you carry large amounts of debt if you’re just paying the minimum. Continue Reading…