Rob Carrick has ad­vice for TFSA in­vestors ahead of 2019’s higher con­tri­bu­tion limit

The Globe and Mail (Alberta Edition) - - REPORT ON BUSINESS - ROB CARRICK PER­SONAL FI­NANCE PEO­PLE ARE RE­ALLY SAV­ING MONEY … BUT START­ING YOUNG COL­LECT­ING TFSA AC­COUNTS

Al­though the limit for 2019 is go­ing up to $6,000, don’t feel as if you need to max it out

The long wait for a higher TFSA limit is fi­nally over. You’ll be able to con­trib­ute up to $6,000 to a tax-free sav­ings ac­count in 2019, up from $5,500 in five of the six past years. The limit was set at $10,000 in 2015, then di­alled back for the next year.

The 2019 limit was con­firmed by the fed­eral gov­ern­ment in a list of ad­just­ments to per­sonal in­come tax and ben­e­fit amounts based on the lat­est in­fla­tion trend. In­fla­tion has been low in re­cent years, but we’ve now seen enough up­ward pres­sure on prices to trig­ger the higher TFSA limit.

To mark the oc­ca­sion of a higher limit, let’s look at smart and not so smart things peo­ple are do­ing with their TFSAs. The source of the num­bers quoted here is Canada Revenue Agency’s lat­est data, which are for the 2016 tax year. In short, there is much more ac­tiv­ity re­lated to con­tribut­ing to TFSAs than there is in with­draw­ing money.

The to­tal value of con­tri­bu­tions in 2016 was $54.8-bil­lion, com­pared with $26.5-bil­lion in with­drawals. A to­tal of 113 mil­lion con­tri­bu­tions were made in the year, com­pared with 19.5 mil­lion with­drawals.

Pro tip: Keep up the great work. In a time of un­prece­dented ac­cep­tance of spend­ing and bor­row­ing, TFSAs have proven to be an ef­fec­tively sticky way to get peo­ple to save or in­vest.

NOT CON­TRIBUT­ING THE MAX­I­MUM I N MOST CASES

It is not a mis­take to con­trib­ute less than the max­i­mum. The mis­take is to think you’re fail­ing if you can’t get to the limit.

There was a lot of com­plain­ing when the TFSA limit was put back to $5,500 from $10,000 for 2016, but just 18 per cent of the to­tal num­ber of peo­ple who added money to a TFSA in 2016 max­i­mized their con­tri­bu­tions. The cu­mu­la­tive to­tal amount of TFSA con­tri­bu­tion room avail­able from the in­au­gu­ral year of 2009 through 2016 was $46,500, yet the av­er­age fair mar­ket value for each in­di­vid­ual who ac­tu­ally made a con­tri­bu­tion was $17,286.

Pro tip: Con­trib­ute the most you can to your TFSA – up to the limit – while meet­ing all your other fi­nan­cial com­mit­ments. You can al­ways catch up on un­used TFSA room in fu­ture years.

US­ING TFSAS MORE AS YOU BUILD WEALTH …

TFSA use rises as peo­ple age, and there’s a no­table ac­cel­er­a­tion at age 50 if you judge by the to­tal dol­lar value of con­tri­bu­tions. The big­gest TFSA users are age 75 and older, though. To start, this group has the most TFSA hold­ers at 1.5 mil­lion and the most to­tal TFSA ac­counts at 2.1 mil­lion. The av­er­age fair mar­ket value for each per­son was $32,111, close to dou­ble the na­tional av­er­age as of 2016. The fair mar­ket value of all TFSAs held by this group was $49.2-bil­lion, or 21 per cent of the to­tal.

Peo­ple in the 75-plus co­hort are very low-key with their TFSAs. Those who made con­tri­bu­tions av­er­aged 3.2 trans­ac­tions for each per­son and those who took money out av­er­aged just 2.5 with­drawals.

Pro tip: TFSAs are a great place to put money you must with­draw from a reg­is­tered re­tire­ment in­come fund each year, but may not need to cover your liv­ing costs. You have to be 18 to open a TFSA, an op­por­tu­nity that many young peo­ple seem to be ex­ploit­ing. There were 103,750 TFSA hold­ers in 2016 who were un­der age 20, and the av­er­age value of TFSAs held by peo­ple age 20 and un­der was $2,978.

Pro tip: TFSAs are phe­nom­e­nally use­ful for mil­len­ni­als as a place to save for neart­erm goals such as trav­el­ling or home­buy­ing, and for long-term goals such as re­tire­ment in­vest­ing. With 13.5 mil­lion TFSA hold­ers in 2016 and 18.3 mil­lion TFSA ac­counts, the av­er­age num­ber of ac­counts for each per­son was 1.4. But a sub­stan­tial num­ber of peo­ple had way more TFSAs than that. In fact, 51,640 peo­ple had five TFSAs and 3,090 peo­ple had 10 or more ac­counts. Why so many? Some peo­ple may be us­ing TFSAs to try out dif­fer­ent fi­nan­cial firms or banks, or to chase in­ter­est deals on high-in­ter­est sav­ings ac­counts.

Pro tip: No­body needs 10 TFSAs. Two or three, max. The fewer ac­counts you have, the eas­ier it is to mind your fees, the in­vest­ments in­side your TFSA and the in­ter­est rates you’re get­ting on sav­ings. If con­sol­i­dat­ing TFSAs, con­sider a qual­i­fy­ing trans­fer (a di­rect trans­fer of your hold­ings) rather than mak­ing a with­drawal and then putting the money in an­other TFSA.

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