The Game Changer – Expanded TFSA

With the cat finally out of the bag we now know a few details of the much rumoured expansion of the TFSA contribution limits from yesterday’s Federal budget (page 232 if you want to read the official text). First off it isn’t a actual doubling of the limit rather it is rising up from the current $5500 per person per year to $10,000.  Still that is a huge increase in room, and it takes effect this year.  The only downside of the announcement was the fact that they stripped out the inflation adjustment on the accounts contribution room.  So enjoy that increase because we are likely not going to see another one for a VERY long time.

Of course a change in Federal government leadership might also trigger this to be a single year event with a roll back in the plan down the road.  But for now it is going to happen this year, so let’s look at the potential implications for this in your retirement plan.

To say this is a game changer for some people is a bit of an understatement.  A couple can now put away $20,000 per year in TFSA and never pay a dime of tax on growth in those accounts.  So the holy grail of retirement planning just got a bit easier: the zero income tax retirement. I’m not sure if you realize this is about your life, but your single biggest bill is likely not your mortgage, but rather your tax bill.  Your income tax portion of it can often be a big chunk of change so if you can reduce that in your retirement years you can often speed up your retirement date.

The trick has often been that while the TFSA’s are great ways to invest they don’t often have enough contribution room to make them your sole retirement investment account.  For example, if you made $75,000/year as a family your RRSP limit is 18% of your previous year’s income or $13,500.  So while the old TFSA limit was close at $11,000 for a couple, now it becomes possible to skip the RRSP entirely for most people and pour everything into a TFSA.  (For those with math inclined minds, if your family makes $111,000 per year you can shelter the same amount in your TFSA as your RRSP now).

But what about the RRSP tax refund?  Well while that is a nice thing to get you do still have to pay tax on your growth of your RRSP at the other end when you take the money out.  While a TFSA you can shelter all the growth from getting taxed.  So imagine you have saved well in your life and have a cool $1 million in retirement savings and a paid off house.  Now imagine never having to pay a dime of tax on that and not having it reduce your Old Age Security benefits.  Cool eh?

So to compare you take our $40,000 a year of income from that in an RRSP you would have to pay tax on that money.  The final amount will vary by province but if only one of you take the money out you would lose anywhere from $5800 to $7700 in income tax for 2015.  Leaving you with a net spending amount of $32,300 to $34,200.  Or you could have put it all in a TFSA and got $40,000 to spend.

In our particular case this means I will likely skip putting money in taxable investing accounts and instead just shelter everything in RRSP and TFSA accounts.  While I might need to keep some contributions aside for the last year or two I can then stuff it all in get caught up in no time (ie: likely two years after retirement).

All in all, there is a fair amount of potential in this announcement for your retirement plans.  Of course, you should still do some numbers for your particular case to ensure it would be worth it to you.  So are you making any changes your plan because of this change?  Or you don’t think it will last?

17 thoughts on “The Game Changer – Expanded TFSA”

  1. My wife and I are still focusing on maxing out our RRSP before adding anything to TFSAs. Our living expenses are about $22000 per year (excluding mortgage payments, since that will be paid off before our early retirement). If we each withdraw $11000 from our RRSP in retirement, we can live below the basic personal exemption and pay no tax. I hope I haven’t overlooked anything here.

  2. My plan (before the expanded TFSA, and the added allowance doesn’t change it) is to use income from taxable accounts and (when I hit the right age) RRSPs until the point where taxes kick in, and use TFSA income above that point.

  3. While it’s obviously good for FIRE folks, for the country as a whole it’s going to be atrocious.

    We already have staggering levels of wealth disparity in the country, and aside from the small group of people focused on early retirement, the group of people that will benefit the most from this by _far_ is high income earners. Average people that work hard yet can only get 30-40-50K jobs won’t mostly be saving the full amount – data from Finance Canada shows that the majority of people utilizing them (only <10% up to age 50!) weren't investing the full amount until their incomes hit 100K+/yr. (Source: http://www.fin.gc.ca/taxexp-depfisc/2012/taxexp1202-eng.asp)

    So what is being created is yet one more exponentially growing pool of money in the hands of the most wealthy in our society. Rich people will max them out, and likely max them out for their kids too.

    But, as Joe Oliver said, "That's for Stephen Harper's granddaughter to worry about", which pretty much sums up the overall philosophy of the Cons.

    What would have been better? Raising the basic tax exemption. Benefits everyone somewhat, the frugal/early retirees a lot, the poor/lower middle class most of all, and doesn't create a gigantic problem in the future that will have to be fixed.

    Of course, the Cons haven't really done anything right yet, so why would they start now?

  4. This announcement is great news for our family! Our RRSP and TFSA accounts are currently maxed out so we’ll be able to throw in another $9000 between the two of us for this calendar year. We will both be FIRE’d by the end of June and we will be given the transfer value of our government pensions. Our plan is to withdraw money from the LIRA using the financial hardship clause (keeping each withdrawal around $10,000 per year to keep it under the personal exemption limit). And the rest of our required spending will come from the TFSA and dividends from our taxable investment account. As you said in this post “the zero income tax retirement!”

  5. Just socked away 9k into our TFSA’s as of ten minutes ago. Now over 115k churning out tax free dividend income. This will really help the success of my early retirement. 🙂

  6. @Ishmael

    Your comments are absolutely inaccurate. I would suggest reading “Financial Uproar’s” post April 8th. It explains that there is really very little in the way of negatives stemming from this.

    I don’t think that a financial blog-site is the best place for political comments. Please… What is the liberals or NDP’s plan? To continue to tax and spend us into being the next Detroit using voodoo math as their guide?

    Sorry off topic above : Can someone confirm that this is in fact an immediate benefit and one can put the additional money away right away?

  7. @Paul N: OK, I read it (after I figured out what you were talking about – http://financialuproar.com/2015/04/08/yes-the-tfsa-contribution-limit-increase-benefits-the-rich-like-it-should/).

    Where exactly is my inaccuracy? The crux of that argument is that yes, the rich will benefit the most by this, but since they are already mega rich this is just a drop in the bucket for them. Not exactly what I’d call stellar reasoning!

    You’re also completely ignoring the fact the Harper’s track record is to load massive amounts of debt on this country ( $176.4billion+, in fact – some in ways that benefit the richest the most as well). Neither J. Trudeau or Mulcair has done that, the previous Liberal government’s fiscal policy was about as good as it gets, and both have promised balanced budgets of their own, and the budget math in THIS budget is what should clearly be labelled voodoo.

    I figured the thought was related to the post, something for everyone to keep in mind, and that Mr. Stobbs wouldn’t mind a bit of discussion. He can feel free to delete it if he doesn’t.

  8. @Ishmael

    I’m tired of listening to people trying to shame any type of success. And when I’m talking success, that’s anyone that’s been able to forgo some things in their life (maybe not having that extra kid that someone else pays for), and been smarter about savings to take care of themselves today + down the road. I also find that most people given a large bump in their pay, only wind up squandering the extra money and still cry they don’t have enough and want someone else’s money redistributed to them. Go figure. I see this happen with my co-workers every day.

    I already pay out more 50% of my total yearly earnings in taxes. (add up ALL your taxes one day) What more should I pay to be wasted by governments and given to those that that may or may not deserve it? I would like to shelter a little bit more of my money that was already taxed once. I would like the opportunity to make it grow at my own risk, so I won’t be a parasite to you or any other Canadian when I am older. What is so wrong with that?

  9. @Paul N I’m not talking about shaming success at ALL. I’m talking about public policy that benefits one group that _already_ has everything over other groups that don’t have the same advantages.

    People that have worked hard, got educated and/or worked hard to make something of their lives are just awesome. Especially the ones that make everything work, and make the world better, like teachers, doctors, nurses, scientists, engineers, etc. But you have to appreciate that when someone has money, it’s incredibly easy to get more.

    In the FIRE community (to which I strongly consider myself a member, as I plan on retiring before age 50) I believe we’ve come by our success honestly. We’ve worked hard to get a good education (or other path to a good income) avoided the consumerism traps, and invested for our success in the future. Kudos to us.

    But I always try to always separate what benefits me personally, and what is the best for the society in which I live. For example, the income splitting policy is tailor made to help me, as my wife currently is focused on our kids development over earning money outside the home, both of my kids are in school, yet I strongly believe that having a national daycare program is a far larger net benefit for the country than income splitting that benefits only me.

    Governments should be held responsible for the efficiently of how our tax dollars are used. That’s far different than saying that tax dollars are wasted though? We NEVER seem to discuss the details of efficiency of programs, only the artificial argument that government programs are either good or bad. And that’s how the politicians like it.

    I despise the direction the Cons have taken – there’s a clear reason why they don’t even bother calling themselves “Progressive ” anymore. Their worst has been their relentless attack on information and knowledge. Gutting the census, muzzling scientists and the propaganda they’ve engaged in are some examples.

    The GST cut was another example of terrible public policy. The GST is actually a pretty good tax, because the more people spend, the more they pay. Rich people spend a lot on luxury items and end up paying a lot in sales taxes. The working poor, and the frugal (like us) don’t really spend that much in sales taxes, because we stick to the basics and use our money for investing. The hard working people pay a lot in income taxes, though. Which is why I suggested basic exemption increases, if your focus is tax cuts. (Basically every economist I read suggested this at the time, too.)

    Anyway, I don’t hate success at all. I just accept as fact that those that have money can get it easier than those that don’t. Working, or running a small business where you’re actually risking your current assets is a heck of a lot harder, and more deserving of reward, than buying some more investments. And that this wealth inequality therefore undermines the concept of rewarding those that work for it, as all of the productivity gains since 1970 have been kept by the ultra-rich, not the people who work for it. Like you and I. RRSPs made sense. The level of TFSAs that was originally implemented was borderline/debatable. This limit increase is just designed to benefit a small few, and that they happen to benefit us is just a by-product of their real purpose. There are better choices to be had!

  10. @Andy – Actually if you live on that amount that is a solid plan…just some people can’t which is why the TFSA increase can be helpful.

    @Paul N – National Post confirmed with CRA go move the money over it is a done deal.

    @John_snow – Nice balance! Good work!

    @Paul N, Ishmael – I don’t mind the occasional off topic discussion in the comments but this isn’t a policy or politics blog so let’s not get carried away too far. Ok?

    By the way, you all had valid points if you read each others comments. I won’t dig in too deep into this sidebar discussion but I will provide the following: the tax system has never been about fairness so debating that is sort of pointless. It’s designed to support business interests (which is why corporate tax revenue is such a small part of what the federal government takes in). Those that support business via investing tend to do better on the whole in their lives. There will always be a gap between people, now how big of one is a valid concern. Highly unequal societies are unstable so there is an upper limit to what will be tolerated in the long run (but we are no where near that yet). Housing prices and debt is a much bigger issue that hasn’t been dealt with at all. This increase to the TFSA was purely a senior vote grab and the Conservatives know it…I will happen to benefit as well.

    Tim

  11. @Tim

    Thanks for policing that. This is not the place to dispute PC or Lib. issues. I doubt that the other poster and I will agree on this issue no matter what we write to each other. Honestly I don’t follow politics in as great detail, so I think I would be over-matched anyway countering specific points. I explained as much as I felt necessary. I believe this change will affect so few people, that any negative effect would be not even worth disputing.

    I just refrained from writing a reply to respect your blog, but you already touched on my thoughts. There will always be gaps and winners and losers. You can’t fix everything.

    Thanks for the answer as well – I also called TD yesterday late in the day. As of about 3pm yesterday you could take advantage of the needy (kidding guys) and add another $4500.00… So I did.

  12. I did a happy dance for a couple of hours. It is just an incredible move by the conservative party to get reelected. Well done haha 🙂

    BeSmartRich

  13. Good points about TFSAs. Now that my income is quite low, and probably lowish for the foreseeable future I’ll max my TFSAs before my RRSPs. However I wonder about what to hold in each. My understanding is tax-wise it’s better to hold US/International in RRSPs, and Canadian stocks in the TFSA. Once I max out my TFSA I’ll have about 25% in TFSA, and 75% in RRSPs. As I’m currently accumulating money I tend to only rebalance by purchasing, not selling. So would it make sense to have my TSFA primarily in Canadian ETF or index funds; and keep mostly US/International in my RRSPs? I wouldn’t be able to re-balance between them, but in future years could chose how much RRSP or TFSA based on the type of investment I want to buy, rather than my contribution limits, as my income is so low. Same as the the first commenter, I also will likely be below the taxable level in retirement since I can chose to withdraw from my RRSP just below the tax cut-off and take the remainder from TFSAs.

  14. I agree 100% with Ishmael. And I also don’t see the problem with expressing such views, it is still a financial discussion. What good is all this financial planning if the policies of Harper totally mess up the country’s finances 20 years down the road. No doubt about it that Harper’s policies help the rich a lot. Now in saying all that, I could never vote for the Trudeau liberals nor the NDP. Harper gets my vote(thus far)by default. And, yes, I have been able to put the max in my TFSA each year, I am retired and have a nest egg that is being sent piecemeal to the TFSA’s

  15. @Meena Yes, there are certainly tax considerations around TFSAs. From what I understand, I think your allocation strategy is a good one, and that you’re right about what you’re planning on holding in each from what I understand about it.

    I think for the FIRE community, the contribution room currently available for RRSPs and TFSAs is plenty, so the rules around investing outside of these types of accounts can be excluded from discussions/consideration.

    Canadian Couch Potato has some good articles discussing these issues that might be of interest. Here’s a couple of links for you:
    http://canadiancouchpotato.com/2010/03/05/put-your-assets-in-their-place/
    http://canadiancouchpotato.com/2015/01/30/the-wrong-way-to-think-about-withholding-taxes/

    HTH!

  16. @Canuckguy

    You criticize all three parties in your post. Does not leave anything as an alternative. Like the song say’s “If there’s a new way, I will be the first in line”. I really don’t understand the “hard on” people have with the PC’s? We were literally the only country that squeaked through the worst recession since 1929 relatively in good shape, some casualties but lighter then most. They must have done something right.

    I live in Ontario. Unless you have lived under a rock, the policies of the present provincial government will impact everyone here negatively. I am also on the pension committee at my work. The wording of the new proposed Ontario pension is quite interesting and confusing to all the PP providers at the moment. If your company already has a plan in place the rules are not clear yet. I hear echos of Nancy Pelosi’s “you have to pass the bill to see what’s in the bill” line in my head going off. Also does it make any sense to hire a whole new dept of government employees to create this plan? Maybe work with CPP or the very successful Sask P. plan use their existing resources and piggyback off them?

    Cap and Trade is a failed policy around the world, and only another name for “more taxes” like “revenue tools” = “taxes going up”. Ontario Hydro will slowly become more of a disaster then they have already made it as well. I’m seriously considering a revenue positive solar install on my house now to counteract the increases. My home value will go up, I will pay less in taxes..? I’ll make money long term. Do we want to create an environment where smart people create their own solutions?

    I believe there is a problem with ALL parties. They are no longer really working for us. Each of them just finds new ways to be dishonest and make promises they know they can’t keep. They do this simply to get elected or re-elected. We hire officials because they are more adept at lying then the merits of their platforms. They only argue over carefully selected policies to get an “edge” over the other party, not truly to explain their benefits. There should be accountability for election promises not fulfilled as well.

    It’s sad that there are NO political alternatives and as you say we vote for the party that we feel is the “least worst”. I have heard of people voting simply because one party promised reduced bus fares for students. Is this voting strategy rational? No it’s pathetic.

  17. @Paul N.
    I voted for the Cons and yes, I will vote for them again but they disappoint me with some of their financial policies as I already touched on. And yes, we weather the big downturn rather well but they inherited a situation of several yearly surpluses from the Liberals. They finally got a small surplus but only through some trickery.

    As for you detailed discussion of Ontario’s plight, well yes, perhaps I do live under a rock, in my case it’s New Brunswick and we are in far worse shape than Ontario.

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