My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, April 27, 2015

TFSAs - Ease of Access, Discipline and Retirement

Last week’s budget confirmed the badly kept secret that the Tax Free Savings Account (“TFSA”) contribution limit would increase. The Conservative government proposes to increase the limit from $5,500 to $10,000 (although, TFSAs will no longer be indexed) effective January 1, 2015. Although I can’t say I fully understand this from a public policy perspective, I think the increased limit is great from a purely financial perspective.

As there have already been numerous articles discussing the advantages of the increased limit and who will benefit the most (here are links to two very good articles by Rob Carrick of The Globe and Mail  and Adam Mayers of the Toronto Star), today I thought I would take a different tact and discuss how the increased TFSA limit will test our human behavioural traits.

Ease of Access, Discipline and Retirement

Ease of Access - A Good Thing or a Bad Thing?

TFSAs allow you to withdraw your money at any time for any reason. The reason could be financial, for example to help purchase a house, or purely for personal indulgence, such as to go on your dream vacation or buy that sports car you always wanted.

One of the great things about a TFSA is that you have the option to re-contribute any money you withdraw from your TFSA beginning January 1st of the following year. However, my concern is once that money is withdrawn, many people will not re-contribute, especially in respect of discretionary withdrawals where the money provided personal gratification.

I have written a couple times that one of the indefinable benefits of a Registered Retirement Savings Plan (“RRSP”) is that it acts as an invisible barrier to protect you from yourself, as some (not all) people treat their RRSP as sacrosanct and only consider withdrawing money for emergencies, or income smoothing purposes. In contrast, TFSAs are inviting with limited barriers to protect you from yourself.

Discipline - Do You Have It?

The easy accessibility of TFSAs will require us to be disciplined if we are not to squander the funds we sock away. It has been my observation that many of us do not have that financial discipline. I have said this before and will say it again; with respect to accessible monies, the path of least resistance generally ends at the cash register.

Retirement - Are TFSAs the New RRSPs?

Over the last few years, more and more Canadians have decided to fund their TFSAs in lieu of their RRSPs. Many people seem to prefer the flexibility and tax-free status of TFSAs and are willing to forsake today’s tax refund (generated by RRSP contributions), for tax-free withdrawals in retirement (to avoid taxable withdrawals from their RRSPs/RRIFs in the future). While this change in retirement funding makes sense where your marginal tax rate today is lower than it will be in retirement, it does not make income tax sense where your marginal rate is higher today than you anticipate at retirement.

Whether the trend of moving to TFSAs and away from RRSPs makes financial sense or not, assuming the budget proposal becomes law, I can foresee the day where TFSAs will become the dominant retirement vehicle in Canada. 

This brings us back to discipline. Much has been written about how poorly many Canadians have saved for retirement and how we need government pension plans (see Ontario) to save us from ourselves. Yet now, it can be argued, the government has in a way incentivized us to not use our RRSPs and is expecting us to be disciplined and use the money in our TFSAs to fund our retirements.

As the expression goes, I am from Missouri on this issue; you will need to show me that Canadians will be disciplined enough to always choose their retirement over the trip to Tuscany.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.


  1. Very interesting findings here. It definitely seems like this policy could do a lot of harm or good depending on how financially savvy the average person is. Here's hoping that they are!

    1. Thx Jordan, its all a matter of discipline and can you resist the temptation to access free cash.

  2. Another thing that gets very little mention is that if you don't use your contribution room and just carry it forward, that you slowly lose it due to inflation. Using CPI numbers, I calculate that instead of $41000 in total TFSA contribution room since 2009, it should be $42827 in todays dollars. Almost like another tax for those who carry forward unused contributions. This applies to RRSPs as well.

    1. Hi Garth

      Interesting point, but take it from me, those with huge contribution room typically never come close to making it up. I have observed this phenomenon with client RRSPs for over 20 years. Most clients who have huge contribution limits, still have huge contribution limits, so the inflation component is often meaningless. U can argue TFSAs will be different, but personally I dont think they will.

    2. I suppose that is true, especially for salaried employees. I was thinking more about small business owners who may prefer to plow any extra cash back into their enterprise....

    3. Hi Mark;
      Until last year I withdrew my TFSA dividends (all div paying stocks) and used that money to pay down my HELOC (invested in div paying stocks). In January of the following year I put in the allowed money PLUS any withdrawals and made my stock purchases. The reason for this was simply because in the first years the divs generated were not enough to buy a good quantity of equity to help cover the transaction. At least the div withdrawals helped pay down the HELOC and saved me some interest.
      As of 2014 I am now retaining the divs in the TFSA as the amount has become sufficiently worthwhile to purchase stocks on a quarterly basis. Currently at approx $300 per month of divs it is well worth it to hold them and re-invest every three months. I always max out my TFSA in Jan. Needless to say that gives the following months a good boost.
      RRSP gets maxed out as well to help cut the tax load. I usually re-invest in the RRSP but Olive Oil gave us a good incentive to put more in the TFSA. I am just waiting for a dip in the market to throw in the extra $4.5K
      Then we'll have a look at the RRSP for this year.



  3. Hi Blunt Bean Counter,

    I'm completely afraid to take money out of my TFSA, because I'm worried they will change the rules and prevent future contributions. The more I put in before they change the rules, the better. If I don't max it out now, and leave that in, I'm going to miss out on potential gains.

    1. Hi david

      Interesting take. I think in the end the government would cap contributions allowed and would therefore have to allow for withdrawals that could be repaid but who knows. U r certainly taking the most conservative route

  4. On the plus side of the flexibility, people may be more willing to save for their future if they know they won't face penalties (including taxes and lost contribution room) should they need to withdraw it a little earlier. This is one of the reasons I have largely avoided RRSPs and often saved uncomfortably large amounts.

    For me the amount I save doesn't change, only where I put it. For others this may be an added incentive.

    Interesting that people are switching from RRSPs in large numbers. Maybe the government hopes to see a further drop in RRSP refunds in the coming years as a result of this change? If the benefits of the increase mostly go to wealthier families, as some claim, those families may be worse off in terms of taxes and the government could benefit.

    1. Hi Richard

      U say "For me the amount I save doesn't change, only where I put it. For others this may be an added incentive."

      If everyone was like you I would not be concerned, problem is I see less saving due to ease of access for many people

  5. A very interesting post! I agree with another commenter in that this policy could go to one extreme or another and do immense harm or immense good. It will be intriguing to see how it all plays out.

    1. Thx Samantha. my guess is harm for many people, but as you say, lets see how it plays out.