Do you swing for the fences, knowing if you pick the right stocks you could
set yourself up for life by holding onto to 100% of your money?
Or do you make like the typical Canadian and meekly put the money into a
nice, safe guaranteed investment certificate with a low return that will keep
you working well into what could have been your retirement years?
Sure, the tax-free savings account was small potatoes when it was introduced
by Conservative Finance Minister Jim Flaherty in the 2008 budget. Starting Jan.
1 the following year, Canadians could invest $5,000. Five years later, and
adjusted for inflation, Canadians can contribute $5,500 annually with the
accumulated limit up to $25,500, as of 2013. The limit climbs every year.
It can’t compete with retirement savings account just yet but TFSAs have
enough contribution room to play the market and reap some major windfalls.
The Financial Post asked Canadians to send us their stories. There
were plenty of tales of people looking for income, sometimes in the bullet-proof
safety of GICs but other times in stocks with decent yields and high prospects
for capita gains.
Then there were the aggressive investors, some buying derivative products and
speculative stocks that trade on the TSX Venture Exchange with massive upside —
and many would say the same level of risk.
Although admitting it’s almost akin to gambling, one reader has seen his TFSA
holdings mushroom past $100,000. Another has close to $80,000.
A common thread that seems to run through all the TFSA victory stories is
tons of research and investors sticking to their area of expertise which often
comes from their daytime employment or a previous career.
“I know the oil and gas sector,” said one Calgary engineer, who avoids his
own company but considers everyone else in the industry fair game.
But those stories seem to be the exception with the investment industry
almost trying to coax clients out of their shell into more strategic — and
higher risk — decisions.
“We would like to encourage our clients to think more longer term and broaden
their horizons with their tax-free savings accounts, rather than stick to a
savings account,” says David Birkbeck, head of registered products strategy at
RBC. “We try to get people to think of it as an investment account.”
Data from the bank shows its own clients tend to play it safe with 44% of
holdings in a high interest savings account with a guaranteed interest rate but
no hope of bigger gains that would make the tax free benefits really stand out.
GICs with their own rock-bottom interest rates hold 21% and mutual funds sold by
the bank make up 35%.
The conservatism is despite the fact there are a wade array of investments
eligible for a TFSA, just like self-directed retirement accounts. If it trades
on a major exchange, you can generally hold it.
It some ways it makes even more sense to be aggressive in your TFSA because
you can keep all the gains, notwithstanding the deep dark fears that the
government will one day claw the money back.
People have had the same fears about changes to retirement savings plans too
but there have been no radical rule changes on that front from any government
since they were introduced in 1957.
The key to your TFSA strategy is ultimately what are your objectives for the
“For some people they think if I hit a homerun there is no tax but there is a
downside that if it doesn’t go well, they are not going to be able to write off
the losses,” said Mr. Birbeck.
The TFSA has proven to be a popular vehicle, even as people differ on
investing strategies for it.
The federal department of finance, in its most up-to-date statistics, said
8.2 million Canadians had invested $62-billion by the end of 2011. Individuals
with income of less than $80,000 accounted for 80% of all TFSA holders.
The TFSA has proven to be very popular with young people looking for
flexibility and lower income wage earners who don’t get as much benefit from an
RRSP contribution that lowers their taxable income.
Toronto certified financial planner Jeanette Brox says her clients and their
style of investing depends on the age group.
“The younger people are like ‘I’m going to buy a used car in three years and
I don’t want any risk’,” said Ms. Brox, adding those people opt for fixed income
so they can withdraw the money when they need it and be sure of the safety of
Senior clients are a different story. “They feel so uncomfortable if they
don’t have $50,000 in cash savings in the bank. That’s going to go into the TFSA
and it’s going to be interest-bearing because that’s where they have been
before,” said Ms. Brox. “They like the idea of not paying tax.”
But are these people making a mistake being so conservative? “I think it’s
just ridiculous,” said Ms. Brox, adding maybe you earn $500 in interest a year
so you are saving a measly $250 in tax.
Clients just feel they are “taking a risk” with money in their TFSA –
something they are willing do more of in their RRSP, says Ms. Brox.
Hatice Pakdil, vice-president and investment advisor TD Waterhouse, concurs
with that view.
“For the most part investors are thinking of it psychologically almost as a
rainy day fund where they can park some extra cash that they need to draw on,”
says Mrs. Pakdil. “There is a lot flexibility in it, so it’s a great savings
Her own advice is to shy away from the penny stocks but look for quality
stocks with good yields that give you capital appreciation at the same time.
“The approach isn’t much different between a TFSA and an investment account,”
said Mrs. Pakdil. “I wouldn’t buy a GIC in the TFSA [unless you’ll need the
money in a short time.]”
She says ultimately the TFSA is a doubled-edged sword. If you know of a big
stock-trading opportunity going up 100%, it’s the ultimate scenario because you
don’t pay any tax.
“But what is really the likelihood of something like that happening? It’s
very difficult to find that type of play, particularly in a market like this,”
said Mrs. Pakdil. “I’m not saying there are not opportunities like that out
there but it’s not my approach. You try something that’s speculative and there’s
also a chance it goes to zero.”
Fee-based certified financial planner Jason Heath says he hasn’t seen too
many clients with large balances in their TFSAs.
“To be perfectly frank, I’m surprised how few TFSAs I see that are north of
$30,000,” says Mr. Heath.
He can’t seem to explain why people are so cautious when it comes to their
accounts with most people not showing many gains above and beyond their original
“I think it’s indicative of the way in it’s been positioned for a lot of
people. It’s really just an emergency account for most people while the RRSP is
more long-term,” said Mr. Heath, adding he thinks the program is going to grow
with balances. “I think it’s also about awareness which is growing.”
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