Do You Have a TFSA?

Well if you don’t have a TFSA (Tax Free Savings Account) don’t worry because apparently you are not alone.  Over at the Wealthy Boomer there is this post which reports that only 34% of people have set up a TFSA so far in 2009.  Another 11% plan to do so by the end of the year, while 49% are going to do it in 2010.

So why are the numbers so low right now?  I would suspect that most people are actually focused on debt reduction right now rather than actual saving money into an account.  Realistically this makes sense since the payback on debt greatly exceeds most fix income type savings products (ie: high interest savings account, GIC…) even if you use a TFSA.  The Great Recession woke up a lot of people to the fact the party is over and maybe it is time to get rid of their debt hangover.

What I found really interesting about the post was the fact if you add up the percentages you get 94% of people either have an TFSA or plan to get one by then end of 2010.  Of course their is the fact that intentions don’t always translate into action, but that is a stagging amount of people that obviously have some interst in getting one.  This would mean that TFSA’s in theory should out pace RRSP as a savings account type of choice post 2010.  In 2007 88% of people could have contributed to an RRSP of those only 31% actually did so (see here).

So who knows perhaps TFSA’s might actually get most of us saving again.  In any case it’s a good thing.

14 thoughts on “Do You Have a TFSA?”

  1. I had planned on starting a TFSA, but life gets in the way of well laid plans sometimes.

    Someday maybe. I think it’s a perfect supplement to my company matched RRSP. 12% of my income goes in the RRSP, and hopefully 8% will go in to the TFSA. That seems like a great target to be planning for the future. Now if only life problems would get out of the way.

  2. Some people may not think it is worth the trouble at this point.
    This may change as their contribution limit and the interest rates go up.

  3. I have one with RBC and Questrade. I believe that your contribution limit increases by 5K a year beginning in the year that you opened it? This would mean by not opening one this year, those people would miss out on 5K worth of contribution room. Yes?

  4. Adam, I was under the impression that all persons age 18 and older started gaining contribution room starting in 2009 regardless of account status.

  5. I haven’t seen any numbers, but I wonder how many people use the TFSA as cash ‘savings’ only.

    I opened one a while back, filled with stocks, and I’m sure grateful for the account. People really seem to link the account to cash only (possibly because of the name).

    Even if people aren’t interested in investing in the stock market, bonds – with reasonable 3-8% annual returns would be a great, conservative holding for the account.

  6. We happen to have TFSAs, but only because I had some non-registered accounts to liquidate.

    But, had that not been the case, I probably would not have rushed out to get one.

    First… your contribution limit grows regardless of having an account, so that is not a worry.

    Second, assuming the TFSA is used for retirement savings, instead of emergency or planned spending savings… there is no significant difference between money in an RRSP or money in a TFSA… AS LONG AS you end up with the correct ratio of TFSA funds to RRSP funds at retirement that will allow you to miminize taxation and maximize government sponsored pension income. I have a pretty complicated spreadsheet that clearly showed that to meet my retirement goals, maximizing my income, I would need to stop funding my RRSP at age 41 and start funding my TFSA at 36, assuming my current RRSP contribution and a maximum unindexed TFSA contribution.

    Everyone’s situation will differ, but TFSAs are not necessarily the best vehicle NOW.

    Something else to consider how unattractive TFSAs are (relative to RRSP). The easy TFSA (GIC, HI savings) yeilds are peanuts, hardly worth even saving the taxes on. Using it for equity investment may bring a high management cost). A single $29 trade commission is 0.58% (or 8x the VTI MER) on the max $5k 2009 contribution. And a single holding is not exactly wise from a diversity perspective.

    I would bet people with unhealthy financials are delaying getting TFSAs because they are paying off debt. People with healthy financials are delaying until their headroom makes a TFSA more lucrative than the RRSP. And the bulk of the current TFSAs are people in the middle of the road that are using them as short term savings vehicles, and maybe didn’t realize that the $5-$10 they are saving in taxes is hardly worth the setup time.

  7. Hazy,

    Actually that’s a good point. Depending on what your investing in the TFSA the time to fill out the paperwork might not be worth the savings for a given year. Yet that is where people are waiting for no good reason. The TFSA’s strength is in compounding interest so regardless of how poor the rate is starting sooner than later is better.

    Adam,

    Feel free to look it up, but it is true. You get $5000/yr contribution room regardless of if you open one up or not.

    James,

    You had some excellent points. Fees on these accounts are critical that is why I’m with Questrade for these accounts. Also diversification is near impossible with such a low amount in the first year.

    I did something similar to James and mainly moved over existing investments in my taxable accounts to shelter future capital gains, distributions and dividends. I’ll likely be doing an analysis at year end to confirm tax savings but on capital gains alone I’m over $400 in savings this year.

    Tim

  8. I have a TFSA! It doesn’t have a lot in it at the moment, but I am more focused on paying off the remainder of my debt.

    I think that anything that gives people a kick in the butt to start saving again, instead of going back to “the old ways” of spend-spend-spend is a good thing.

  9. My wife and I opened up TFSAs at Questrade too. No fees, low commissions.

    I loaded them up with REITs, a proxy-index with 3 REIT stocks in each account to give us some pretty good diversification within the sector. We also turned on the synthetic DRIP feature to repurchase additional shares at no cost.

    Total fees were about $40 for 6 trades so only a 0.004 MER and I’m happy to report our accounts are up 51% and 53%! $5000 of tax free profits sure beats the $100 we would have gotten from interest.

  10. Thanks CD, I looked it up and stand corrected and smarter!

    I also have my TFSA at QT, low fees. Just make sure you turn off all those paper statements from QT and Penson Financial. They charge you a fee for those as well.

    Adam

  11. Interesting stats; I had no idea that the number of people having TFSAs were that low thus far. I have a TFSA account and saving to invest into my wife’s TFSA prior the year’s end. Nice post

  12. No wonder only 34% of Canadians have one. The saving rate in Canada is disastrous 😉

    Most people can’t contribute to their RRSP, so where would they find the money to contribute in their TFSA 😉

    They are better off paying down their credit card first!

    disclaimer; I don’t have one… contributing to the max of my RRSP…

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