You Did What With Your TFSA?

Dear Minister of Finance,

While I deeply appreciate you bringing innovation to the entirely boring landscape of Canadian investing with the introduction of the Tax Free Savings Accounts (TFSA), I have to say you screwed up with the name.

By using the word ‘savings’ in the title of these accounts you have firmly linked them forever to basic savings accounts.  This has resulted with the majority of Canadian’s only investing in a high interest savings accounts which save them almost no tax.  For example, $5000 at 1.5% interest only produces $75 a year in interest.  At a 40% marginal tax rate, that person has only saved $30 in tax over the ENTIRE year or $2.5o/month.  It’s so tragic of a waste of a tax shelter it makes me almost weep.

While most people would assume this would be a sorry accident I have to almost wonder if the name was intentional in order to ‘save’ the reduction in tax revenue to the government of Canada.  While this is a cynical thought, I admit, I have to believe instead that you were trying to do the right thing and this is but  a tragic mistake.  So before it is too late, might I request you rename the accounts: Tax Free Investing Accounts(TFIA).  Save the people for their own simple conclusions and make this innovation of yours truly great.

After all, won’t it be wonderful to educate the public simply with an example that if you own a dividend paying stock in their TFIA they can have stream of tax free cash for as long as they own it.  Then even when they sell they would then pay no capital gains tax.  So that others may have the joy of knowing they have saved nearly $1500 in tax on a $7500 investment like me.

Thank you for your time and consideration to this modest proposal.

Tim Stobbs

16 thoughts on “You Did What With Your TFSA?”

  1. Well said!

    I always thought it was an awful name to give to something that the Americans call a “ROTH IRA”. At least give it a name like RRISP (Registered Retirement Instant Savings Plan) or something that would make people think: OH! Investing!

    It’s painful to hear people only saving a basic amount in there instead of using it for dividends, stocks, index funds… ANYTHING. (I like index funds in TFSAs)

  2. Amen.

    If there are people who want to invest money in a TFSA for only 2.5%, I’ll pay 3.5% and use the money to invest else where to earn 20%.

    The government makes money the same way the mutual fund industry does, by taking advantage of people who do not know the ‘rules’.

  3. Not necessarily. If all of your retirement savings fit in your RRSP (because you’ve been building up room while you were at University but didn’t have anything to put in it, and the rest of your investments are short term (going to be used in the next 2 years) then it makes sense to keep them in something low risk and liquid in your TFSA. That said one your retirement savings out grow your RRSP it makes sense to then add them to your TFSA.

  4. I hold mostly canadian REITS in our TFSA’s. Brings in $330 every month tax free. It’s a beautiful thing.

  5. Unfortunately, renaming it Tax Free Investing Accounts probably more people would never even use it. “Oh, I know nothing about investing.” :/

  6. Though I have maximized my TFSA from the get go, I just recently have the ability to put stock into it. However at the moment, I am just too chicken to make
    that leap into the stock market. Perhaps if I get drunk to buck up my courage, I will make the leap.

  7. Canuckguy,

    It is not that difficult of a thing to do. If you are feeling a bit apprehensive to make the leap, increase your knowledge about it by reading some books about it more. A good beginner book is “The Idiot Millionaire” by Derek Foster. The reason being is that my 55 year old father read it and got a lot out of it. He normally does not read and now he can’t seem to get enough of the investing books.

    The second reason is that Derek employs the same strategy as jon_snow does, living and looking forward to the monthly dividends to live off of tax free.

    Before making any sort of jump into anything, learn some more about it, and the more you learn about it the less there is to be fearful of.

    It is a learning process and can take some time to understand.

    @ Jon_snow

    Great work, I’m working on getting my TFSA max’d out as well and doing the same thing with the monthly dividends.

  8. I agree with Edward. It’s a no-win scenario. No matter what something is called there will still be many people who don’t take advantage at all, or don’t take advantage to the greatest extent or will never understand anything about it. The name of the RSP is no better. I had to explain to my husband about both things being investment vehicles for any type of investment, not RSP = GIC and TFSA = Savings account. And he still doesn’t understand that I’m just as uncomfortable with him having all his money in savings accounts and GICs as he is with me having my money in index funds. But we do what we feel is right.
    I think what bothers me the most is reading on other forums when people have tons of money in cash for whatever reason not making use of the TFSA at all. Sure, it’s only $30 but it’s $30 that you’re not getting. And if you have closer to the current max sitting around in taxable savings accounts anyhow, you’ll make quite a bit more than that.

  9. Pingback: Friday Links
  10. @Kestra

    Do you think the problem comes down to a lack of financial education with 99% of people?

    I was sitting in my car on the way to work and listening to the most recent cd from Success Magazine and the second speaker on the cd is an entrepreneur from a company called LearnVest. It is not often that I pay close attention to what the speakers are saying, but they have taken financial planning to an all new level. Very basic things like helping people to understand how to get a mortgage, paying down debt etc.

    Does anyone think we need to change the way children are taught in schools to promote creativity and self thinking instead of the current teaching method which is based upon an old Prussian military model of training soldiers?

  11. I agree, I think the name should be changed to Tax Free Investment Account. Or even just Tax Free Account.

    I never know what to put in my TFSA. I have to admit that I have most of it in a savings account (2.55%), and some in a Streetwise Balanced index fund.I would like to maximize my TFSA’s potential as much as possible as I got started late and hope to semi-retire in 7 years.Seeing the returns that Jon Snow gets on REITS, maybe that is something I should research.

  12. You mean to tell me that TFSAs have barely cut into tax revenues so far and could be doing much more to reduce the government’s income? I’m sure the ministry of finance will get right on that 🙂

    In all seriousness I’m sure they are trying to find ways to help people save. But regardless of how the government sells it, people will still go to their banks and hear about all these wonderful safe GICs and PPNs.

    It seems like those who lose the most from these are low-income people who are investing a lot in their RRSPs and people who have substantial non-registered investments. The former case doesn’t seem very common anyways and in the later case I’m sure a lot of those people have an advisor (a few may even have a good advisor).

    I would rather the government spend time on resolving the tax issues with foreign dividends in TFSAs than coming up with a new name for them.

  13. @ Value Indexer,

    So the low income earners are the ones who are losing the most on the RRSP’s but also keep in mind all of the other benefits or money they get from the government that is not available to people who are in the disappearing middle income bracket.

    I would rather the government focus on its own inefficiencies in order to reduce useless headcount and tasks. Take a continuous improvement approach.

Comments are closed.