"Tax-Free Savings Account" sucks but everyone should have one.
Updated: Mar 16, 2018
Disclaimer: I am in no way, shape, or form a financial advisor. I am just a guy that loves finance (and money) and wants to share my knowledge so that others can learn (and make money). I repeat, I am an amateur at best, not a financial advisor. Do your own research before investing. Don’t be silly. I am simply repeating what I have found works for me and you should use me as just that, an additional source of information among plenty that you maybe consider whilst making your own choices. Thank you!
Okay, let me begin this by stating that this will not be a hit piece about the Tax-Free Savings Account (= TFSA) or a rant about why the TFSA sucks; I am actually a huge fan of the TFSA. If used correctly, the TFSA will benefit you in achieving any of your financial goals, whether you’re planning to save for a new car, buy a house, go travelling, or whatever else you may possibly need to save for in this expensive lifetime. I want it known that my beef here is solely with the insanely misleading naming of this vehicle (ironic title is ironic).
Let me explain. First and foremost, The Tax-Free Savings Account IS NOT A FUCKING SAVINGS ACCOUNT – making the name super misleading. The TFSA is an investment account which I think makes it much more valuable than a savings account and I will explain why in a minute. Now, I know that this may be a silly quarrel to pick over naming semantics but bear with me. By labelling this account as a savings account, the federal government has effectively pulled the metaphorical “wool” over people’s eyes. It tricks the public into not taking full advantage of this beautiful account. Now I get that it’s up to the individual to do their due diligence and research on the matter and at the end of the day it shouldn’t matter because the informed individual should realize that “hey, I can invest in this account”, but I feel like the simple mislabeling of this account confuses prospective future investors. They may not even realize that they are missing out on such an amazing opportunity. You tell me, but I think that Tax-Free Investment Account is a lot more straight forward and appealing than a Tax-Free Savings Account (although a TFSA still sounds pretty appealing as well). If the government truly wanted to grow and strengthen the middle class then why not try to appeal to as many citizens as possible, especially when you’re offering them a vehicle as amazing as this one. They have already done the hard part, now all they have to do is relabel it properly. Anyhow, if you use the TFSA as a savings account and not as an investing account you have been tricked and need to keep reading!
Why do I love the TFSA as an investing account? Well put simply, any income earned in a TFSA, ie. Investment income, dividends, capital stock gains, are (for the most part) fully non-taxable. Yes, non-taxable (obviously check with your local accountant and lawyer). And sorry rest of the world, this privilege of an account is only available in Canada and South Africa. In both countries, the TFSA contains a yearly maximum contribution cap, which is a great thing because schools, police, firefighters and health-care infrastructure (any social service really) needs tax money. One glaring difference is that South African legislation caps the contribution at a lifetime cap of R500000 (approx. 54,000 CAD) and Canada does not currently have a lifetime contribution cap. Luckily anyone in America and the UK has access to similar accounts, the Roth Individual Retirement Arrangement and the Individual Savings account respectively. Albeit these accounts are not entirely the same, so do your due diligence and further research and find out the individual differences.
Now, I hope that you fully realize how crazy an opportunity like this truly is. If not, let me explain some more. I always felt like graphs and pictures were the best ways to describe finance, so let me run some quick maths by you and then I will follow it up with some graphs so hold tight. I have bolded the overall figures for you. PLEASE KEEP IN MIND THIS IS ALL TAX-FREE. THAT IS THE DRAW TO THIS. THESE NUMBERS GET A LOT MORE INSANE WHEN YOU KEEP THAT IN MIND. Or, if you want to skip this section and focus on the graph, be my guest! Okay, here we go.
Let’s say that you get an amazing bank deal of 2% interest on cash in your TFSA and you are allowed to make yearly contributions of up to $5500, now over a 20-year period this will add up to a decent sum of money, roughly $136,308. Now, if you account for your contribution of $110,000, you end up with a profit of $36,308 for an overall return of around 33%. Not bad!
Now, let’s take that same initial capital and invest it into the stock market (which obviously takes research of its own). If you can manage a 15% return per year over a 20-year period, which may be a little liberal but honestly could be an achievable target, the results are outstanding! Over 20 years, you will have accumulated roughly $644,955. This is an incredible profit of $534,955 or an overall return of a whopping 486% on your investment, damn.
I don’t think I need to tell you which one is better. Keep in mind that this is only over 20 years. Presumably you are still a young millennial; It’s not crazy to assume that you could continue this on for another 20 years (or longer – no ones stopping you). I ran some more quick maths to illustrate just how crazy this can get, and it’s all TAX-FREE!
Now, at a 2% return over a 40-year period where you would have saved around $338,855, this equates to a profit (-220,000 invested) of $118,855 or a 46% return on investment (ROI). Now, this is where things start getting crazy. At a 15% return for a 40-year term you will have accumulated around $11,252,745 (11 million dollar profit – nice) or a 5000% ROI. Holy fuck. Do you see now why I find this approach so great? Keep in mind that this is a perfect scenario where you can manage a 15% return a year for 40 years, it is very likely that will not always be the case.
Okay, so just for fun I ran this scenario for 60 years. Here are the numbers in short form: 2% @ 60 years = $639,829 saved (330,000 invested). This equates to a profit of $309,829 (94% ROI).
15% @ 60 years = $184,816,447. Profit of do you even care at this point?
You’re a motherfucking multimillionaire at this point. Relax. Buy some property. Do your thing. Have I made my point with all of this? Here’s the graph comparing the two up to 20 years (the discrepancy between the other numbers was too large for the graph to work).
I hope I have at least piqued your interest enough to at least get you to consider opening a TFSA and learning more about investing! Everyone can do it. There’s no trick to it. And to anyone interested in the math behind the scenes. I am only including up to year 20 due to trying not to put everyone to sleep.
Now, it needs to be mentioned that both these numbers were calculated based on compound interest strategy. This strategy is definitely one to implement in your own investing routine. I will cover compound interest in the future as it needs a post of its own– it is truly a wonder to behold. Now, I am not going to further delve into the complexities of investing in this post or I would be droning on forever and this post was simply to inform people of the TFSA. I will definitely be talking more about finances in the future and I hope you stick around, but once again – I am not a financial advisor.
And remember, when in doubt, reinvest your earnings!