TFSA - Why Bother Anymore | Page 2 | Tax Free Savings Accounts | Discussion forum

Alexandre said
I must be one of few, but I would not mind interest rates going up, even if it will force real estate bubble to deflate.

After all, the only thing I am enjoying from house prices skyrocketing is higher property taxes, limited ability to move somewhere as price of new house even in more remote area than mine is out of my reach, and rent too high to consider selling house and living in an apartment.

This is on top of diminishing returns from Savings, due to dropping interest rates.  

Rising interest rates would be great for us savers, but they won’t rise anytime soon as there is way too much debt in the world and that’s also weighing down the world economy, which in turn, creates low inflation. High inflation is the main reason for central banks to raise rates. As much as I think it’s a bad idea, lower rates in our near future, are more likely. I’m hoping rates just hold for now.

This not using TFSA and instead a Normal Saving account means, you know of a place where their normal HISA is at least 30% (Considering income tax of 30%) higher than the TFSA. I am not aware of any.

I still maximize my TFSA, RRSP, and put aside the extra in HISA.

PS. I haven't done RRSP and RESP yet this year. Hoping we get some better rates in the future.

This is the day I like to withdraw any straggler TFSA amounts that might be still sitting in TFSA HISAs that I don't intend to intend to keep there, can recontribute to TFSA in a month and no December interest to leave behind which would be the case if I withdrew later this month and December's interest doesn't show up until Jan 1.

Same here. Today is Straggler Day.

Understand that some people are ideologically opposed to equities but for anyone else…

TFSAs are misleadingly named. This type of account is great for equities. I made a mistake of using TFSAs as a saving account early on. It was the worst financial mistake I ever made. Now I only keep GICs and cash in non-reg accounts and maximize the use of TFSA room for investments.

Works A LOT better. TFSA investments have been happily compounding at 7% for the last 5 years (I don’t track 4-year spans). That’s doubling every 10 years (assuming one does not add new money which I do).

mordko said
Understand that some people are ideologically opposed to equities but for anyone else…

TFSAs are misleadingly named. This type of account is great for equities. I made a mistake of using TFSAs as a saving account early on. It was the worst financial mistake I ever made. Now I only keep GICs and cash in non-reg accounts and maximize the use of TFSA room for investments.

Works A LOT better. TFSA investments have been happily compounding at 7% for the last 5 years (I don’t track 4-year spans). That’s doubling every 10 years (assuming one does not add new money which I do).  

Since capital gains and dividends are taxable at lower rates I prefer to buy equities in a nonregistered account. I use the TFSA for the 6% GICs , the interest which would be taxed at much higher rates if in nonregistered. Of course it all depends on the individual’s tax bracket.

canadian.100 said

Since capital gains and dividends are taxable at lower rates I prefer to buy equities in a nonregistered account. I use the TFSA for the 6% GICs , the interest which would be taxed at much higher rates if in nonregistered. Of course it all depends on the individual’s tax bracket.  

You’ll find that your tax rates are indeed lower - just like you suggested - but the amount of money you pay out to CRA is higher. And, crucially, the amount of money you get to keep is lower. Thats because equity growth rates are higher than GICs most of the time.

To do this properly one needs to compare alternative approaches with the objective of maximizing after tax returns. The only challenge is that returns are not known in advance.

Yet another way of looking at this is by assigning a fixed equity vs FI allocation on an after-tax basis. Someone who has a 60/40 portfolio but has 40% Fi in TFSA and 60% equities in non-reg does not have a 60/40 portfolio on an after tax basis. And its the after tax basis that matters.

The simplest and, arguably, best approach is to keep asset allocation constant across accounts,

If one is going to have equities as part of one portfolio, e.g. as in an ETF such as XIU (Canadian TSX60 large caps), I agree with Mordko it is more effective to have it in non-registered and fixed income in registered (TFSA or RRSP) on an after tax basis. Over the last 10 years per https://www.blackrock.com/ca/investors/en/products/239832/ishares-sptsx-60-index-etf XIU had a CAGR of almost 8% over 10 years. Fixed income on a 10 year CAGR basis is far lower, perhaps only about 3-4%.

From a performance perspective, one wants their high(er) return assets in the TFSA as they escape tax impacts. That all said, to each his/her own. We each do what we feel best for ourselves.

Like Mordko, I feel I made the mistake of putting only GICs (and a few bonds) in my TFSA for the first 5-7 years, and then I woke up to doing a complete reversal, and now I have only equities in the TFSA in the form of VEQT ETF. It will hopefully continue that way for the rest of my life.

canadian.100 said

You say equity growth rates are higher than GICs most of the time - probably true in the long term but in last few years when inflation and interest rates increased so much that did not help markets. Next year when inflation and interest rates subside, the markets will likely have some recovery, based on past trends. There is pressure now for interest rates to reduce and I do agree that would be advantageous for the stock market in 2024 and 2025. Also, I think a change in govt from Liberal to a more business oriented, fiscally responsible Conservative govt in the next year or so would also be beneficial for Canadian business and Canadian stocks. However, I will still keep stocks in my nonregistered account and the 6% GICS in my TFSA....my preference.  

The future is uncertain but the past is not like what you say. Markets had one bad year: 2022. Before that we’ve had double digit returns for 3 years. And looks like we may have double digit returns again in 2023.

Inflation provides an extra incentive to shield assets with higher returns from taxes. If you buy a company, the value of the asset will grow with inflation even if inherent value does not change. But the government will tax that inflation-related growth as capital gains when you sell.

Also to note: it’s wise to invest in a diversified portfolio which is not limited to Canadian stocks. And the favourable treatment of dividends which you focus on does not apply to foreign stocks.

Anyway, to each his own.