THE STACK #5

We’ve all been there before, we walk into the bank trying to withdraw money or do something else, and suddenly the teller says...

“Oh, I see you don’t have a TFSA” would you like me to open one”? And we go ....."uuuuuuhhhh sure,” without even fully understanding what we signed up for.

It’s not your fault. I find that Canadian banks do an excellent job of pushing products on customers without taking the time to educate them on the full functionalities of the product.

So what exactly is a TFSA?

THE STACK

A TFSA is a Tax-Free Savings Account designed to protect our investments (yes, I said investments) from taxes.

In a TFSA, you contribute your post-tax income (basically your take-home pay) and use the contributions to buy investments such as Index funds, ETFs, stocks etc.

Whenever you sell those investments at a profit (capital gains), those gains will not be taxed if your investments are held inside a TFSA.

The TFSA is an extraordinary account, as most other accounts you invest in will get taxed upon withdrawal.

Where I find people go wrong is using this as a simple savings account.

Your TFSA should never be used as a savings account.

It should always be invested because most savings accounts offer a very low-interest rate, and you will not be optimizing the full benefits of a TFSA if you leave your savings in there. I call it a waste of contribution room!

Here’s how you should be optimizing your TFSA:

Short-term goals < 1 year

Invest in a one-fund ETF (for example, VGRO(+14.60% 1 yr return, VBAL +9.94% 1 yr return).

These are diversified enough to be low-risk but still give you good returns that can help fund some of your short-term goals.

Only do this with an amount you can afford to lose, as short-term investing is risky!

Short-term goals 1-3 years

Invest in an S&P 500 index fund or ETF (example: VFV, +25.75% 1 yr return*)

Short-term goals 3-5 years

One Canadian total stock market ETF (example: VCN 23.85% 1 yr return*) and one US stock market ETF (example VUN +24.29% 1 yr return*)

Long-term goals > 5 years

A well-diversified portfolio of:

❖ Canadian total stock market

❖ US total stock market

❖ International stock market

You can zhush it up by adding bonds, stocks, crypto, REITs or whatever you desire.

The best way to get your money to work overtime is to invest it, so if you have any cash sitting in your TFSA collecting dust, it’s time to invest it!

*Disclaimer: All securities mentioned are for informational purposes and should not be taken as professional or tax advice, do your own independent research and fact-check every statement made in this email. Consult the services of a financial advisor to find an investing profile that best suits your personal needs. You stand a higher chance of losing money when investing for a shorter term, so if your risk tolerance is very low, you should hold it in a savings account instead. Investing in the stock market has its risks, and past returns do not guarantee future returns. The returns reported for the aforementioned ETFs were accurate at the time this post was being written and can change at any given time.

THE TOOL

Do you know that if you max out your TFSA contribution room every year, you could end up with over 1 million dollars at retirement? 🤯

(Based on a 35-year horizon and an 8% annual interest rate and assuming a $6,000 yearly limit)

See for yourself. 👇🏾

I like to use this Compound Interest Calculator for my investment projections.

THE ACCOUNTABILITY

Looking to max out your TFSA contribution room this year? One trick I like to use is to invest my tax refunds. This is what I plan to do this year as well (depending on how much I get back).

In fact, if you get a refund from contributing to your RRSP, you're only getting an advance on the future taxes you will pay at withdrawal, so investing your tax refund is the only way you actually get the full benefits of an RRSP.

Check out this Instagram post I did explaining the full details.

THE COURAGE

THE KNOWLEDGE

EXCHANGE-TRADED FUNDS

An Exchange Traded Fund (ETF) is a fund that contains multiple securities such as stocks, bonds, REITs, commodities etc.

The goal of an ETF is to mirror the performance of an index.

Example:

An S&P 500 index ETF will have all 509 companies on the S&P 500 index and would have the same performance as the S&P 500.

ETFs are similar to index funds, but the key difference is that they are sold on a stock exchange, just like stocks!

That's it for this week's STACK!

Talk to you next week,

But until then...Keep Stacking!

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