Stockpiling “dead money”
Financial planner Jason Heath’s mind boggles when he thinks about the high percentage of Canadians stockpiling what he calls “dead money” into tax-free savings accounts.
“There’s a lot of average Canadians out there that have been led to believe that parking a few thousand dollars in a TFSA in cash, or a near-cash equivalent investment paying one per cent, is somehow a good idea,” says Heath, managing director of Objective Financial Partners in Toronto.
“Arguably, money sitting in a TFSA at one per cent is a total waste of savings.”
Year after year, surveys performed by the Bank of Montreal show that a large number of Canadians are using TFSAs exclusively for cash reserves.
Their most recent report, published last year, showed Canadians using TFSAs held an average $17,133 in their accounts — with 65 per cent holding exclusively cash as opposed to any type of investment.
Heath’s main objection to using TFSAs to only sock away cash is the mindset that these accounts should be used exclusively for short-term savings goals whereas RRSPs should be used for long-term savings goals.
“When people contribute to the RRSP they invest for the long term and they actually give themselves the opportunity to earn a rate of return,” he says.
“But TFSAs seem to have this draw that has people park money and not invest it. And on that basis alone, I’d rather see the average Canadian in an RRSP because they’re that much more likely to actually invest money.”
Preet Banerjee, author of “Stop Over-Thinking Your Money!,” believes the name tax-free savings account itself is the biggest problem contributing to people using TFSAs counter-productively.
“Just by virtue of having the two words ‘savings account’ in the name, a lot of people think that’s all it will ever be,” he says.
What they don’t realize, he notes, is that TFSAs, like RRSPs, can hold a variety of investments including bonds, mutual funds, ETFs, stocks and gold.
And with the current TFSA contribution limit for those who have yet to open an account adding up to as much as $52,000, that offers a sizable amount of room to invest tax-free.
“Over a lifetime this is a viable alternate or complement to the RRSP when it comes to long-term savings,” Banerjee says. “And, in fact, one of the main advantages of a TFSA is to help people have a more effective retirement if they’re in a lower income tax bracket.
“I think if more people knew that they might be more willing to do something possibly more productive with their tax-free savings accounts.”
For Heath, there are few scenarios in which it would make sense for someone to have cash in a TFSA.
“If someone’s a renter and doesn’t own a home and have a low-interest secured line of credit, then a TFSA in cash may not be a bad choice,” he says.
“Or you might be someone who is a conservative investor and is going to hold a large allocation to cash in their portfolio no matter what. You might as well hold it in your TFSA rather than in a non-registered account if you had the opportunity.”