Your TFSA is For Saving For Retirement

The Tax-Free Savings Account is the best saving and investment vehicle available to Canadians. To date, you can contribute up to $31,000 (with an additional $5,500 of room coming available for 2015), and all the interest, dividends, and capital gains you realize in the TFSA are totally tax-free. You can hold any investment vehicle within the TFSA, from a savings account to common stocks, and you can withdraw your funds without penalty at any time. The only thing you have to watch is over-contributing to the accounts, for which there are steep penalties.

Under the TFSA umbrella, I hold cash in a savings account, GICs, and a brokerage account in which I buy common stocks and ETFs. My balance between these vehicles essentially represents my risk profile, which means most of my money is in stocks rather than cash.

As I’m making my financial plan for next year and years going forward, I’m changing my investment strategy to match a changing perspective of my wealth-building plan. Since I’ve decided I’d rather get rich than simply stay afloat, the way I manage my accounts is paramount to my plan.

One of the first ways I’ve decided to maximize my net worth is to

stop using my TFSA as a catch-all account,

and start treating it like the tax-advantaged wealth-building tool it actually is.

In the past, I’ve never managed to max out my TFSA because I always needed the money for other things. I came close in 2013, but then used a ton of my savings for my MBA tuition, and then the contribution limit when up $5,500 and I fell even further behind.

I have the opportunity to regain all lost ground and max out my TFSA in 2015. 

It’s not an easy task, but since I’ve committed to increasing my net worth by $36,500 in 2015 – coincidentally, exactly the amount the TFSA contribution limit will be in 2015. Because I already have money in my TFSA, only part of my net worth goal will be going into this account, and the rest will be going into my RRSP. (Otherwise I would have loved to simply call 2015 “project max out the TFSA” but alas, it is not an empty account).

Once the TFSA is maxed out, I’m doubtful I’ll have any reason to take money out of it in the near future.

Goodbye, TFSA. You're not spending money any more.

Goodbye, TFSA. You’re not spending money any more.

Instead, I’ll simply focus on continuing to increase if/as new contribution room is added each calendar year, and redirect my cash-flow to my RRSP until that is maxed out too. I realized I don’t want to miss out on any gains by making withdrawals from my TFSA. Any at all. Because of the tax protection of this account, I want it to grow, and keep growing, without me sabotaging the compounding of my investments.

Previously I used my TFSA for any kind of savings: vacations, tuition, and my emergency fund. But every time I build those savings up, I took them out to spend on whatever I planned, and missed out on that money compounding further.

It has since occurred to me that I don’t really care if I’m taxed on the $15 my vacation savings earns in interest over the course of a year,

I would much rather simply pay that and keep my long-term savings in the TFSA.

I have unregistered savings accounts that I’m starting use for planned spending. For example, the joint savings account my fiancé and I set up to pay for vacations and our wedding next year. I also opened a margin account with my brokerage, so I can invest in stocks outside my RRSP and TFSA. This provides a lot of flexibility in how I manage my money, and lets me leverage all the available tax exemptions and deferrals while maximizing the bottom line of my net worth.

Thinking about my TFSA as retirement savings will take some getting used to. One of the reasons I always sung the praises of RRSPs is because there was such a tax penalty for taking money out of these accounts, I would never be inclined to make an early withdrawal. However, with the TFSA the government of Canada isn’t going to care if I liquidate my investments to go to Mexico, and as a result I have to be self-disciplined enough not to make early withdrawals. Like most things, I expect this to be easier said than done.

But the reasons to treat your TFSA as retirement savings are easy to see.

Unlike RRSPs, you’ll never pay taxes when you withdraw money from your TFSA, which means if you build up a mountain of cash over your working lifetime, you’re not going to lose as much of it to the tax man when you’re old and grey. One of the most annoying things about saving in an RRSP is knowing that some of what you’re saving is just to pay taxes. Think about that next time you pat yourself on the back for saving whatever percentage of your income! Kind of takes the wind out of your sails, but that annoyance is non-existent with the TFSA.

The second reason is if you change your thinking about what the money is used for, that will also deter you from making a withdrawal. In other words, you don’t necessarily need a real tax penalty to keep your fingers out of your bank account, knowing that money is for something other than spending will probably be enough to keep you from spending it. After all, if you have the discipline to save up for a vacation or another major purchase, you definitely have the discipline to not touch your money for a few years.

So now I’m counting the contents of my TFSA as retirement funds, and saving for things like vacations in unregistered accounts. I think I’ll be a lot richer because of it!

How I Earned a 17% Return on My Money in The Stock Market By Doing Absolutely Nothing

In the last week of October 2013, I received my retirement savings from my old job. When I worked full-time at the University of Alberta, participation in the employer pension plan was mandatory, which means ~11% of my gross salary was put in a retirement fund before my paycheque even hit my bank account. The university matched this contribution, but because I left before the 2 year mark (only 1 week shy!), I forfeited my employer contributions.

You might think it’s dumb to bail out of an employer-matched retirement plan only days before securing the funds, but the university pension plan was extremely poorly managed. Semi-annually I’d receive a report about how they were paying out more than was going in, which was not that reassuring that the funds would still be there for me 40 years for now. Furthermore I had no say in how this money would be invested. I love being in control of my money and making my own investment decisions, so even if I’m not as well-trained or experienced as a professional fund manager, I still like to be in charge of my own finances. By leaving my job right before the 2-year date, I was allowed to withdraw the money I had contributed and put into my own registered retirement accounts.

I took 100% of my retirement savings from my old job and opened an RRSP brokerage account with Questrade.

  • I purchased 6 stocks (paying about $30 in trading fees for these purchases).

  • For 1 full year I did not add any more money to this account.

  • Any dividends I received, I reinvested in dividend-paying ETFs

  • In short, I did absolutely nothing to manage the money. No day-trading, not even regular check-ups on the account. It was literally a “set it & forget it” situation.

    In 12 months, my money in my RRSP brokerage account grew by 17%. 

My stocks paid out 4% in dividends, and the rest of the return was growth. This means most of the return is unrealized — I don’t get it unless I cash out right now, which I have no plan to do. I fully expect to experience dramatic stock market volatility in my investing lifetime, so 2014 was a good year but I don’t expect every year to be like this. Some years will return more or less (even negative), but since this is my RRSP, the earliest I can access it is 30 years from now so I’m ready to weather some ups & downs. The numbers below are accurate as of Nov. 3:

My best performing stock was Pepsi, which generated a 27% return.

(The Canadian dollar has fallen 5.7% compared to the US dollar in the past 12 months, which accounts for some of this return)

My worst performing stock was Northern Properties REIT which produced a 5% return

(This stock is actually valued at almost exactly what I bought it at, down to the penny, but it pays a good dividend which accounts for the return).

If you’re eyeing my return and wishing you could replicate it, guess what?

It’s not that great.

My 17% is only slightly higher than the 15% the index returned for the same time period. 

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S&P 500 over the past 12 months

That means you could have essentially replicated this performance over the same 12 months by simply buying an index fund. And why not? 15% or 17% is a heck of a lot more return than you’d get from investing in a simple savings account. Actually, even my major under-performer that only kicked back 5.15% in dividends is way better than a savings account!

Moral of the story: don’t be afraid to invest in the stock market, start right now!

Opening a brokerage account with as little as $1,000 is enough to get started. You can purchase units in an index ETF, and continue to contribute to the account monthly or every 2 months as your income allows. As your portfolio begins to generate dividends, you can use this money to purchase more investments, generating more money, and so on until your reach your financial net worth goals.

But I’m not leaving this account alone for another year! Now that I’m employed full-time in my career, I’ll begin monthly contributions to my RRSP brokerage account as soon as I receive my first paycheque. I’ll also continue to invest in my TFSA brokerage account, and I still have very good intentions to someday maybe use my margin account. While all three of these accounts are for investing in the stock market, they all serve different purposes and my investment strategies are different for each. As for the RRSP, it’s all about maintaining a super-safe portfolio with a steady dividend.

How We’re Saving $100,000 For A Down-Payment (P.S. I’m engaged!)

Greetings readers! I have some big news: My boyfriend proposed on September 21 and we’re engaged! He proposed after a 4km hike in the rocky mountains — and I used the car ride home to snapchat shots of the ring to all my cousins and call my parents.

me & my husband-to-be at my cousin's wedding this past July

me & my husband-to-be at my cousin’s wedding this past July

I’m still not used to saying “fiancé” but “my betrothed” confuses people and takes up too many characters on twitter.

We’re still deciding what kind of wedding we want — both of us have the same financial values, so it’s hard to think of spending tens of thousands of dollars on a single day. On the other hand, it’s hard for me to turn down the opportunity to throw a really big party ;) We haven’t set a date, but we’re thinking Fall 2015. Right now I’m in a rush to find a decent venue for that time. Many I’ve called area already booked for Sept/Oct next year, and I’m hesitant to go later because there will be snow on the ground.

I don’t know how much I’ll be blogging about wedding planning.

Firstly, because I know enough about the wedding industry to be an unwilling participant in much of the nonsense beyond a decent dinner and an open bar. I don’t care. I just don’t freaking care about bridesmaids and wedding colors and centrepieces and having a Say-Yes-To-The-Dress moment. This isn’t new: I’ve been singing this tune since 2011.

Secondly, because I’m so sick of reading “frugal wedding” posts (sorry recently married PF blog friends!) that I can’t justify contributing to the collection. There are hundreds, possibly thousands, of personal finance blogs that have done excellent posts on how to save money on your wedding. You don’t need me here, kids.

That said, I do have a lot to say about getting married, so I’ll be blogging about that soon.

We’ve been sharing finances since we moved in together, but now that we’ve committed to sharing a life together, we’re now sharing major financial goals. The first?

We’re saving six-figures for a down-payment on a home.

If you think that number is totally ridic, I don’t blame you. But I recently blogged about real estate prices where we live, and $100,000 is an appropriate sum to ensure we’re putting over 20% down. It’s important to pay for at least 20% of your home’s value in the down-payment to avoid insurance fees. By putting 20% down (or more, depending on the final purchase price), we’re ensuring a lower monthly payment, a more affordable mortgage, and starting with a strong equity stake in our first property.

How are we going to save such a large sum in 2-3 years?

The most obvious way is there’s two of us contributing, which means we each need to save $50,000. $50,000 is still a big number, but it’s not nearly as intimidating as $100K. Both my fiancé (god, still so weird to say that) and I are savers, so we’re not starting from scratch, and there are some tools to help us:

Each of us can withdraw up to $25,000 from our RRSPs under the first-time homebuyers plan to be used as a down-payment, giving us $50,000 together. I’ve set a personal goal to get my RRSPs to $100,000 by age 33, which means withdrawing $25,000 (that I have to pay back within 15 years) will not eviscerate my retirement accounts. Options like this are available all over the world, such as the Homestart first home buyers grant Perth, so it’s worthwhile to see what’s available where you live. It is very important to me NOT to have all my funds in one place, and that includes a home. Since I’ve already saved a significant amount of money in my RRSPs, my goal right now is rebalancing so I don’t have to sell more profitable investments, such as stocks, when I make the withdrawal under the first-time homebuyers plan. I’m hoping my RRSP withdrawal under the HBP will be primarily cash and a low-cost mutual fund, with the bulk of my retirement savings remaining in stocks and ETFs. I recently bought a 2-year GIC RRSP to plan for this.

This leaves only $25,000 each to save up outside of our RRSPs. Now, don’t get me wrong, $25,000 is not petty change, but with a 2 or 3 year timeframe it’s very manageable — mostly, again, because we’re not starting from zero. The TFSA contribution limit is currently at $31,000 with another $5,500 to be added for 2016. Since I withdrew a ton of money out of my TFSA over the past 1.5 years to go back to school for my MBA, I’m actually not sure if I’ll be able to max out my TFSA in the next 2-3 years since now I have to catch up and save up to the new contribution limits, but at least I can get over $25,000. Again, I am hesitant to sell profitable investments like stocks and ETFs or wipe out my Emergency Fund which I also keep in my TFSA, but it’s still the best account tax-wise for saving, so it’s better to put my down-payment fund money here than anywhere else.

When we buy a house and how much we put down will depend on a lot more than just saving up $100,000 — such as market fluctuations, interest rate changes, and even what city we live in (I think we’ll stay in Calgary, but I’d be open to moving to another major Canadian city if our jobs took us there). In the meantime, saving now means being prepared to take advantage of opportunities later.

What are your thoughts on our $100,000 down-payment? How much did you save for your first home? What are your strategies for putting money away?

Saving $100,000 in my RRSP by Age 33

Now that I’m employed full-time again, I’ve revisited some goal setting in my savings. One of my main focuses (which seems to be intensifying as I’m getting older!) is saving for retirement. I like accumulating lots of retirement savings, not just for the security in my future old age, but also because of options like the First-Time Homebuyer’s Plan, which would let me withdraw up to $25,000 from my RRSPs for a down-payment on a home. Still, the primary goal of my retirement savings is net-worth building. These are long-term investments that I don’t plan to withdraw from for decades, but make me happy now to see a big balance on my personal net worth sheet!

Because my income is primarily from blogging and now a summer internship, I’m still not totally sure what my total income will be for this year, but I’m guessing it will not be high enough to be favourable tax-wise to contribute to my RRSPs. Consequently, I’m directing my savings to my TFSA, even though in my mind it’s still ear-marked for retirement. I can always transfer the extra savings from the TFSA to RRSP if I need the tax advantages in future years and/or continue to contribute a little bit to my RRSPs and claim the deduction later. My primary goal in the next 2 years is to max out my TFSA, and then focus on maxing out my RRSP.

I would like to have saved at least $100,000 for retirement by age 33.

Originally, I thought age 35 but since I’ll be about half-way to $100K at age 30 after only saving for 5 years, it doesn’t seem reasonable to expect less savings success in the 5 years following my 30th birthday! I think age 33 is a short enough time away (5 years) to be challenging but still doable. I’m actually hoping to exceed it, but I don’t want to sacrifice other financial goals for it so middle ground at $100K seems just right! As far as past and current progress though, this fits in just right:

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my retirement savings plan & progress (low savings rate for age 27 & 28 because I’m currently an MBA student!)

I made the savings right slightly more aggressive in later years for 2 reasons: 1) it’s more likely than not my income will be higher as I age and 2) as I save more money, more interest & dividends are earned each year helping me reach my goals faster. I’m hoping when I finish school and work full-time as a salaried employee again, I find an employer with a retirement matching program of some sort too!

Currently my retirement savings is comprised of cash savings, a mutual fund, and stocks in this proportion:

Screen Shot 2014-06-19 at 10.56.02 AM

While I love investing in the stock market in order to get a higher return on my money, as years go by I will want to reduce the risk in my retirement assets so I’m expecting by age 33 the distribution will look more like this:

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I’m not sure if I’m totally on board with having $15,000 of cash and $20,000 in mutual funds lying around — right now I’m hungry for more risk than that. Furthermore, because the stocks have higher returns, that account is growing faster than my other investments and I can’t really wrap my head around saving more as cash rather than buying more stocks, but that’s what I’d need to do to get this pie. Nevertheless, designing a rough framework gives me a bit of an idea of where and how to save.

The main component of this plan is just being disciplined enough to grow my retirement savings by $12,000+ per year, and the main risk is market fluctuations since the bulk of my savings is in the stock market. 

Saving $100,000 for retirement by age 33 is attractive for a number of reasons, namely that banking six-figures so early gives the nest egg a number of decades to grow before I need to make any withdrawals.

$100,000 invested at age 33 returning 5% will grow to nearly $500,000 by age 65 without any further contributions.

As per usual, I’m always advocating shortcuts, and I can’t think of a better one than getting six-figures into your retirement savings in your early 30’s!

Why You Shouldn’t Borrow To Invest In Your TFSA & RRSP

*Note: I’ve updated some of the wording in this post since it went live to replace the places where I said “borrowing on a margin” to say “borrowing to invest”. I was using the terms interchangeably when they’re not for these types of accounts: “Government regulations prevent you from trading with margin in registered accounts like RRSPs, TFSAs and LIRAs.” (because it’s dumb, as you will see in the post below). Sorry for the confusion! I had also typed ‘ever’ as ‘every’ so this definitely needed a proofread ;)

You can and should open brokerage accounts within both your TFSA and RRSP. I suggest the TFSA first, because if you’re a new grad just starting out, it’s unlikely your income is high enough to justify aggressively contributing to an RRSP — particularly if you paid for your education yourself and have tuition credits you can claim. For an understanding of how an RRSP and TFSA differ, here’s a quick cheat sheet:

The TFSA vs. RRSP

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 The main difference between a TFSA and RRSP is how the funds in each account are taxed, particularly in a brokerage account. In a TFSA brokerage account, all dividends, interest and capital gains you earn on your investments is tax free. This is a huge advantage in this account because if you continue to reinvest dividends and interest, the compounding income will also be tax-free. In your RRSP, you’ll also benefit from compounding, however you will be taxed on all these gains when you withdraw the funds with the exception of borrowing under the first-time Home Buyer’s Plan or the Lifelong Learning Plan. To learn more about withdrawing from your RRSP, check out this post: Ways To Use Your RRSP For Things Other Than Retirement.

A seasoned investor might understand that using leverage like cash borrowed on a margin for trading is a quick way to grow you money. After all, if your investments increase in value, the more you’ve put in, the more you’ll get out. However, if your investments lose money,  twice because you still have to pay back what you borrowed. Taking this risk on accounts that have contribution limits is idiotic. If you lose even part of your investment, you never get that contribution room in your TFSA or RRSP back. Which is why I suggest…

Don’t borrow to invest in your registered accounts!

Borrowing to invest can turn very expensive, very fast. Depending on where you get the funds to invest, the total borrowing cost could vary from 3% on a line of credit to 18%+ if your funding it with a credit card (I don’t even want to go into how stupid that is).

This means that when you borrow to invest, you need the stock to earn at least 3% to 18% just to break even, and even more if you want to make a profit!

I don’t think it’s unreasonable to earn 3%+ on a stock, but shooting for 18%+ is a little more challenging.

and what if you lose?

This is where it gets nasty. For example, someone borrows $5,000 to invest in a hot stock in their TFSA. They borrow this at 6% so in a year’s time they will have to pay back $5,300. They dump all $5,000 plus an additional $5,000 of their own money for a total of $10,000 into one stock and watch it for 12 months. It falls, and then falls agin, finally plummeting down 20% to $8,000 by year end. Finally ready to call it quits, the investor withdraws their money and pays off the $5,300 they owe the brokerage, leaving only $2,700 for themselves. This means of the $5,000 of their own money they initially invested, they lost nearly 50%. Ouch!

They also lost the contribution room in their TFSA.

That’s $2,300 that could be safely earning interest in a savings account. If you’re thinking buying stocks in your TFSA at all is risky because a loss will always translate into a loss of contribution room, you’re right. And that’s why investing in stocks is riskier than keeping your money in a simple savings account. But what’s most important to note is this:

borrowing to invest unnecessarily magnifies risk. 

If the person had invested only $5,000 of their own money, they would have suffered a loss of only $1,000 instead of $2,300. If they had saved up the extra $5,000 they needed and gone all in for $10,000 just like in the example, they’d only be down $2,000 instead of $2,300. It’d still be a loss, but at least they’d have an extra few hundred dollars. They’d only realize a loss of 20% instead of 46%. That’s a HUGE difference!

The scenario plays out the same way in your RRSP. If you borrow and lose, the RRSP contribution room is gone forever. If you’re serious about building wealth, you know that investing in stocks in a registered account is risky enough and you don’t want to magnify that risk with borrowed money.

Is it ever ok to trade on a margin in your TFSA and RRSP?

Honestly, it’s up to you! I’m too risk-averse to gamble with fire in my registered accounts but some investors might really feel confident borrowing to invest in their TFSA or RRSP. As a seasoned investor with maxed out registered accounts that have already returned some extra money for you, you might feel comfortable taking the plunge and buying on a margin. Ultimately, it comes down to what kind of investor you are. But if you’re like me and still managing small investments (less than $50,000) and still learning the ropes of the stock market, buying on a margin is simply too much risk for too little reward.

What are your thoughts? Is borrowing on a margin in your registered accounts a great way to build up your long term savings or too scary to play with contribution room you can’t recover?