According to BMO’s annual Investment Survey, Gen Z is now Canada’s most engaged generation for tracking financial goals.
Younger Canadians are flexing their financial savvy by evaluating their financial goals and plan more frequently than any other cohort: including Boomers!
According to the survey, 62% of Gen Z (aged 18-25) and 54% of Millennials (age 26-41) review their financial goals at least quarterly, with 41% of Gen Z and 29% of Millennials doing so monthly. In comparison, only a third (36%) of Boomers (aged 58-67) review their financial plans at least once a quarter and only 15% of them do so monthly.
“It’s exciting to see the next generation of Canadians building solid financial habits and establishing a foundation early” said Nicole Ow, Head, Retail Investments at BMO, in a press release, “Real financial progress is a lifelong pursuit as our goals and circumstances change throughout our lifetime. We encourage Canadians of all ages to consider ways not only to grow their wealth and work towards immediate financial goals, but also to ask their advisor how they can align their investments with their values, define their longer-term goals, and protect and share their wealth with their loved ones and the causes that mean the most to them.”
Social media a big influence
While the survey found the majority of young Canadians rely on advice from a professional when making financial decisions, what’s more interesting is the additional sources they are seeking out for guidance. Many are currently working with a financial advisor, and 47% of Gen Z and 32% of Millennials say they were referred to their advisors on the advice of a trusted friend or family member. The impact of social media on the financial habits of young Canadians also mustn’t be overstated. A third of Gen Z and 22% of Millennials refer to financial influencers and social media for their investment decisions. In comparison, only 7% of Canadians over 55 utilize these sources.
Barriers to Entry
Among younger Canadians with savings primarily held in cash, half of Gen Z and close to two fifths of Millennials say the primary reason for this is that they do not know how to invest. Whether it’s not knowing where to begin, or being unsure who to trust with their finances, a lack of basic financial literacy skills being taught in schools may be partly to blame for this. Thankfully, the previously mentioned alternate sources that young Canadians seek out can help to educate those feeling overwhelmed. Continue Reading…
The federal government kept the annual TFSA contribution limit at $6,000 for 2022: the same annual TFSA limit that we had since 2019. It’s still good news for Canadian savers and investors, who as of January 1, 2022, have a cumulative lifetime TFSA contribution limit of $81,500.
The Tax Free Savings Account (TFSA) was introduced in 2009 by the federal conservative government. The TFSA limit started at $5,000 that year: an amount that “will be indexed to inflation and rounded to the nearest $500.” The TFSA limit is expected to increase to $6,500 in 2023.
TFSA Contribution Limit since 2009
The table below shows the year-by-year historical TFSA contribution limits since 2009.
Year
TFSA Contribution Limit
2022
$6,000
2021
$6,000
2020
$6,000
2019
$6,000
2018
$5,500
2017
$5,500
2016
$5,500
2015
$10,000
2014
$5,500
2013
$5,500
2012
$5,000
2011
$5,000
2010
$5,000
2009
$5,000
Total
$81,500
Note that the maximum lifetime TFSA limit of $81,500 applies only to those who were 18 or older as of December 31, 2009. If you were born after 1991 then your lifetime TFSA contribution limit begins the year you turned 18.
You can find your TFSA contribution room information online at CRA My Account, or by calling Tax Information Phone Service (TIPS) at 1-800-267-6999.
TFSA Overview
The Tax Free Savings Account is a flexible vehicle for Canadians to save for a variety of goals. You can contribute every year as long as you’re 18 or older and have a valid social insurance number.
That means young savers can use their TFSA contribution room to establish an emergency fund or save for a down payment on a home. Long-term investors can use their TFSA to invest in ETFs, stocks, or mutual funds and save for the future. Retirees can continue to save inside their TFSA for future consumption or withdraw from their TFSA tax-free without impacting their Old Age Security or GIS.
Unlike an RRSP, any amount contributed to your TFSA is not tax deductible and so it does not reduce your net income for tax purposes.
Your contribution room is capped at your TFSA limit. Excess contributions will be taxed at 1 per cent per month
Any withdrawals will be added back to your TFSA contribution room at the start of the next calendar year
You can replace the amount of your withdrawal in the same year only if you have available TFSA contribution room
Any income earned in the account, such as interest, dividends, or capital gains is tax-free upon withdrawal
How to open a TFSA
Any Canadian 18 or older can open a TFSA. You are allowed to have more than one TFSA account open at any given time, but the total amount you contribute to all of your TFSA accounts cannot exceed your available TFSA contribution room.
To open a TFSA you can contact any bank, credit union, insurance company, trust company or robo-advisor and provide that issuer with your social insurance number and date of birth.
The most common type of TFSA offered is a deposit account such as a high-interest savings account or a GIC.
You can also open a self-directed TFSA account where you can build and manage your own savings and investments.
Qualified TFSA Investments
That’s right: you’re not just limited to savings accounts and GICs. Generally, you can put the same investments in your TFSA as you can inside your RRSP. These types of allowable investments include:
Cash
GICs
Mutual funds
Stocks
Exchange-Traded Funds (ETFs)
Bonds
You can contribute foreign currency such as USD to your TFSA. Note that your issuer will convert the funds to Canadian dollars. The total amount of your contribution, in Canadian dollars, cannot exceed your TFSA contribution room.
If you receive dividend income from a foreign country inside your TFSA, the dividend income could be subject to foreign withholding tax.
Gains inside your TFSA
Some investors may be tempted to put risky assets inside their TFSA account to try and earn tax-free capital gains. There are two advantages to this strategy: Continue Reading…
My latest MoneySense Retired Money column describes the first New Year’s Resolution most of us can accomplish on or soon after January 1, 2022.
And unlike resolving to go to the gym or to buy (and use) that new Peloton, this is one you can tick off your to-do list within minutes of changing the calendar to 2022.
I refer of course to making your annual TFSA contribution — $6,000 this year — and you can read all about it by clicking on the highlighted text here to go to the full MoneySense column: Why contributing to a TFSA is a Good Resolution.
Every year since the program commenced in 2009, as close to January 1st as possible, each member of our family faithfully adds the maximum contribution amount (initially $5,000, briefly $10,000 and currently $6,000) to our TFSAs. And because we view them not as tax-free savings accounts but as tax-free Investment accounts, they have all grown substantially: to the point my family members do not wish the exact balances to be divulged to this broad readership. Arguably, TFSA is a misnomer: they should have been called TSIAs.
The column describes Robb Engen’s blog, titled “A sensible RRSP vs TFSA comparison” which reprises David Chilton, who said it all depends on:
If you go the RRSP route, don’t spend your refund.
If you go the TFSA route, don’t spend your TFSA.
Whatever route you go, save more!
How about the Cash Flows & Portfolios blog entitled Can you retire using just your TFSA? It begins with this glowing commendation for the TFSA: “The opportunity for Canadians to save and invest tax-free over decades could be considered one of the greatest wonders of our modern financial world.”
The blog’s authors (known only as Mark and Joe) conclude that if you start early enough (like our daughter) you could indeed retire using just a TFSA.
To recap the rules: the cumulative contribution amount as of Jan. 1, 2022 is now $81,500. If you believe in the time value of money, it follows that you should contribute the full $6,000 the moment the new year begins, which is why I always call it “New Year’s Resolution Number 1.” Unlike joining fitness clubs, you can tick this one off your To-do list moments after you sing Auld Lang Syne (assuming you use an online discount brokerage).
Because of the long time horizon, young people could well put only equities into their TFSA, and if they do so from the get-go they will far outstrip the performance of the sadly all-too-common default option of parking TFSA funds in GICs that pay almost nothing relative to inflation.
Not only does an 18-year old have a good 47 years until the traditional retirement age of 65, keep in mind that unlike RRSPs, you can keep contributing to TFSAs well into your 90s or 100s, if you live that long. I knew a lady who was contributing to hers past age 100! Those near retirement could ratchet it down to a conservative Asset Allocation ETF like VBAL, ZBAL or XBAL, all of which cover the world of stocks and bonds in C$ in a traditional 60/40 asset mix of stocks to bonds.
I do try to avoid putting US-based dividend paying stocks or ETFs in the TFSA: put those in your RRSP or RRIF. Canadian dividends and interest belong in a TFSA, as do speculative US or foreign stocks that don’t pay dividends.
Speaking of RRSPs, what about the perennial question of which to fund first: TFSA or RRSP? My short answer is to do both but if you really have to choose, I’d pick the TFSA in most situations. Certainly, young people in a low tax bracket and older folk who are in danger of seeing OAS or GIS benefits clawed back should prioritize the TFSA.
Those in top tax brackets by virtue of high employment income should maximize their RRSPs but if you’re in the top tax bracket then you can probably also afford to maximize your TFSA. If despite such a high income you are encumbered by a lot of mortgage debt and/or credit card debt, I’d even suggest liquidating some of your TFSA to eliminate some of that debt: you can always regain your lost TFSA contribution room in future years and once you are debt-free there should be few obstacles to maximizing retirement savings in all such tax-optimized vehicles.
Retirees face a myriad of questions as they head into the next chapter of their lives. At the top of the list is whether they have enough resources to last a lifetime. A related question is how much they can reasonably spend throughout retirement.
But retirement is more than just having a large enough pile of money to live a comfortable lifestyle. Here are some of the biggest questions facing retirees today:
Should I pay off my mortgage?
The continuous climb up the property ladder means more Canadians are carrying mortgages well into retirement. What was once a cardinal sin of retirement is now becoming more common in today’s low interest rate environment.
It’s still a good practice to align your mortgage pay-off date with your retirement date (ideally a few years earlier so you can use the freed-up cash flow to give your retirement savings a final boost). But there’s nothing wrong with carrying a small mortgage into retirement provided you have enough savings, and perhaps some pension income, to meet your other spending needs.
Which accounts to tap first for retirement income?
Old school retirement planning assumed that we’d defer withdrawals from our RRSPs until age 71 or 72 while spending from non-registered funds and government benefits (CPP and OAS).
That strategy is becoming less popular thanks to the Tax Free Savings Account. TFSAs are an incredible tool for retirees that allow them to build a tax-free bucket of wealth that can be used for estate planning, large one-time purchases or gifts, or to supplement retirement income without impacting taxes or means-tested government benefits.
Now we’re seeing more retirement income plans that start spending first from non-registered funds and small RRSP withdrawals while deferring CPP to age 70. Depending on the income needs, the retiree could keep contributing to their TFSA or just leave it intact until OAS and CPP benefits kick-in.
This strategy spends down the RRSP earlier, which can potentially save taxes and minimize OAS clawbacks later in retirement, while also reducing the taxes on estate. It also locks-in an enhanced benefit from deferring CPP: benefits that are indexed to inflation and paid for life. Finally, it can potentially build up a significant TFSA balance to be spent in later years or left in the estate.
Should I switch to an income-oriented investment strategy?
The idea of living off the dividends or distributions from your investments has long been romanticized. The challenge is that most of us will need to dip into our principal to meet our ongoing spending needs.
Consider Vanguard’s Retirement Income ETF (VRIF). It targets a 4% annual distribution, paid monthly, and a 5% total return. That seems like a logical place to park your retirement savings so you never run out of money.
VRIF can be an excellent investment choice inside a non-registered (taxable) account when the retiree is spending the monthly distributions. But put VRIF inside an RRSP or RRIF and you’ll quickly see the dilemma.
RRIFs come with minimum mandatory withdrawal rates that increase over time. You’re withdrawing 5% of the balance at age 70, 5.28% at age 71, 5.40% at age 72, and so on.
That means a retiree will need to sell off some VRIF units to meet the minimum withdrawal requirements.
Replace VRIF with any income-oriented investment strategy in your RRSP/RRIF and you have the same problem. You’ll eventually need to sell shares.
This also doesn’t touch on the idea that a portfolio concentrated in dividend stocks is less diversified and less reliable than a broadly diversified (and risk appropriate) portfolio of passive investments.
By taking a total return approach with your investments you can simply sell off ETF units as needed to generate your desired retirement income.
When to take CPP and OAS?
I’ve written at length about the risks of taking CPP at 60 and the benefits of taking CPP at 70. But it doesn’t mean you’re a fool to take CPP early. CPP is just one piece of the retirement income puzzle. Continue Reading…
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 …
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 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…
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Move aside, Boomers: Gen Z is coming through!
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