Readers asked about how to tell if their TFSAs are successful, how it compares to other investment tools, and how to best pass along the funds to loved ones.Melanie Lambrick/The Globe and Mail
On Thursday, Nov. 21 at 11 a.m. ET, The Globe and Mail’s investing editor Darcy Keith, alongside financial planner Owen Winkelmolen and economist and investing writer Larry MacDonald, answered reader questions about TFSA best practices and shared advice on how to effectively use one of Canada’s best financial tools .
Mr. Keith and Mr. MacDonald have written for The Globe’s TFSA Trouncers series, where they asked successful Canadian investors how they grew their TFSA balances.
During the Q+A, readers asked about how to tell if their TFSAs are successful, how it compares to other investment tools, and how to best pass along the funds to loved ones. Here are some highlights.
How to maximize your TFSA
What’s the 2025 TFSA contribution limit?
Darcy Keith: The 2024 annual contribution limit is $7,000, and it’s going to remain at $7,000 for 2025 (It’s set every year based on long-term accumulate inflation calculations).
Should you always max out your yearly contribution? How do you make use of your lifetime TFSA unused contribution room?
Larry MacDonald: You don’t need to max out every year and can let your contribution room accumulate. Then, when it’s most convenient, make contributions in any amount up to the accumulated contribution room.
What’s a normal amount to have in your TFSA account?
Owen Winkelmolen: “Normal” will vary quite a bit depending on age, residency, and tax planning goals. For example, people at higher income levels might prioritize RRSP contributions so their TFSAs may be quite a bit smaller.
Statistics Canada shares details on number of TFSA accounts open, unused contribution room, size of accounts, etc.
But from working with clients building retirement plans, if they’ve been contributing since 2009 when the TFSA was introduced, and they’ve been using their TFSA as an investment account, their balances range from $150,000 to $200,000 with only a handful of clients above $200,000 (as of 2024).
What’s your advice around withdrawing money from a TFSA account? What are some dos and don’ts that I should be aware of? How often can I withdraw?
MacDonald: A common misstep is to make a withdrawal and then recontribute an amount in the same year. If you have maxed out your contributions beforehand, CRA will consider your re-contribution to be an overcontribution, subject to a 1%-per-month penalty. The re-contribution must be made after the year of the withdrawal to avoid this.
Is it best to have dividend stocks only in a TFSA?
Winkelmolen: The income earned inside a TFSA is tax free regardless of the type of income being generated. Whether that be capital gains, Canadian dividends, foreign dividends, interest income, etc.
So the total return matters a bit more than the type of return.
The only nuance is that the withholding tax applied on foreign dividends is not recoverable in a TFSA.
Thinking internationally
Why aren’t TFSAs recommended for people who have dual Canadian-American citizenship?
Winkelmolen: At the moment the RRSP is recognized in the tax treaty between U.S. and Canada, but the TFSA is not. The TFSA was introduced after the tax treaty was finalized.
Cross-border planning between the U.S. and Canada is quite nuanced, so its best to speak with your cross-border accountant about tax-filing requirements in the U.S. if you are a U.S. citizen or a dual U.S./Canadian citizen.
Is the RRSP better than the TFSA for U.S. or other foreign investments?
Winkelmolen: It’s an interesting question. When you’re in the same tax bracket now and in retirement, the TFSA and RRSP provide the same tax-free growth. The RRSP receives a tax deduction upon contribution and will incur tax upon withdrawal, but when a person is in the same tax bracket upon contribution and withdrawal, the accounts both provide the same net after-tax benefit. Here is an example.
So all things being equal, because the foreign withholding tax is not recoverable in the TFSA, this is one reason why the RRSP is often suggested for U.S. assets.
Retirement planning
How should the average earner prioritize contributing to their TFSA vs. RRSP?
Keith: Answering this question really comes down to personal circumstances and goals. One key thing to consider: If you think your income is going to be significantly lower in retirement, then making RRSP contributions now often makes the most sense when your income is higher and you can generate a nice tax refund. Most ideal situation would be contributing both to your TFSAs and RRSPs while working.
Winkelmolen: This depends entirely on your marginal effective tax rate now versus retirement. If your marginal effective tax rate is higher now than in retirement it can make RRSP contributions more attractive. Your marginal effective tax rate is the combination of your marginal income tax rate and your government benefit clawback rate.
However, as another example, during retirement, an RRSP withdrawal can reduce Guaranteed Income Supplement (GIS) benefits. GIS benefits are very generous, but have clawback rates of 50 per cent to 75 per cent. This makes it more impactful than income tax. If someone expects to be eligible for GIS in retirement then this makes TFSA contributions more attractive.
We would recommend creating a detailed financial plan with an advice-only financial planner. Making an informed and strategic decision between RRSP and TFSA can easily save $10,000 to $100,000’s in tax and government benefit clawbacks.
Is it prudent to maximize my TFSA contributions by transferring funds from my RRIF?
Winkelmolen: Every retirement situation is different, but yes, it is a common retirement decumulation strategy to draw down the RRSP/RRIF a bit faster and contribute the excess cash flow to the TFSA.
Having those funds in the TFSA still allows them to grow tax free but the TFSA account is generally more accessible and this additional flexibility/liquidity can be advantageous.
However, we would recommend creating a retirement decumulation plan specific to your situation as there can be reasons not to make those additional RRSP/RRIF withdrawals to maximize the TFSA.
What is an optimum strategy for withdrawing TFSA funds for living expenses in retirement?
Winkelmolen: “Optimum” is different for everyone. Every retirement situation is different, but as an example, TFSA withdrawal can be extremely helpful when trying to maximize retirement benefits like the GIS. GIS benefits are reduced based on taxable income, but withdrawals from a TFSA are not taxable and will not impact GIS benefits.
As another example, “mixing” withdrawals in retirement can help you maximize certain tax brackets and manage tax in retirement. So you may choose to withdraw some retirement income from a RRSP/RRIF and some from TFSA to achieve certain tax planning goals.
That being said, often the TFSA is the last place we want to draw from in retirement, its important to create a retirement plan specific to your situation.
On succession
What steps do I need to take now in order to assign and provide quick access to my TSFA to a benefactor of my choice upon my death?
Winkelmolen: Check your successor holder and beneficiary designations and ensure they fit with your estate plan. These designations will ensure your TFSA will flow quickly to the correct person/persons.
Can I name anyone as my beneficiary successor?
Winkelmolen: Only a spouse or common-law partner can be a successor holder but anyone can be a beneficiary.
The way we like to explain the difference between a successor holder and a beneficiary is that the successor holder “gets the account” whereas the beneficiary “gets the money”.
So a beneficiary can contribute “the money” to their TFSA if they have contribution room themselves.
But a successor holder gets “the account” regardless of if they have TFSA contribution room.
If I designate my kids as beneficiaries of my TFSA do they have to pay tax after they inherit the TFSA?
Winkelmolen: The assets in the TFSA will be withdrawn tax free and the beneficiary will receive the proceeds/assets, there will be no tax to pay.
The only nuance is if the TFSA is part of your estate, then probate fees may apply. Speak with your estate lawyer or accountant about the pros and cons of avoiding probate fees.
The TFSA Trouncers series
I’m concerned that the TFSA Trouncers series is encouraging too much risk-taking in TFSA accounts. Isn’t this just looking at gamblers who won?
Keith: It’s a valid point – those who have scored TFSAs in the many hundreds of thousands of dollars, even million-plus, have for sure taken on higher-risk investments. But I wouldn’t say the people we have featured are outright gambling. For the most part, they did a fair bit of research before making their decisions, and in most cases, decided to get into growth investing. In some cases, that could be making an educated guess on Shopify, or getting into cannabis stocks before the bubble burst, or fully understanding the potential and risks of cryptocurrencies. Huge risks, huge rewards – but for the most part, these bets made within a TFSA were only a small part of the person’s overall long-term savings or income stream.
As our advisors often comment at the end of these instalments, investors need to know what they are getting themselves into, and be prepared for big losses that can not be taken later as a capital loss – a big disadvantage of the TFSA account. For many people, it may be wise to only allocate a small part of their TFSA balance to higher risks investments, if at all.
MacDonald: Most people should not be doing what the Trouncers are doing. As for the Trouncers, they can take risk because of some aspects of their situation. For example, they may be retired with a good pension that covers their living expenses. Or their spouse has a very conservative portfolio. And so on. Each profile points out these factors and usually state that what the trouncers are doing is quite risky. The financial advisors commenting on the profile point this out, too.
Stories of people with $2 million+ in their TFSA challenge my belief in patient investing. What about investors who have had negative results?
Winkelmolen: The TFSA is an incredibly valuable account, especially when it comes to tax planning in retirement. The permanent loss of TFSA contribution room due to a bad investment can not only be impactful due to the loss of investment assets but also the loss of tax planning opportunities in the future. Its always important to choose investments that are inline with your risk tolerance and time horizon.
Your first TFSA Trouncers story featured a retired military member who was generating $11,000 a month in tax-free income. How can he possibly accomplish that, even with his $800,000-plus TFSA?
Keith: Some readers were puzzled how he could possibly generate so much income. The answer is that the investor held a lot of covered call ETFs (I have a spreadsheet of his holdings, and there are a lot of them, with the view of having some diversification). Some included tickers BKCL BMAX HYLD, QQQY, SVOL. You’ll see some have remarkably high yields, in the 15% area in some cases.
Now, some caution here: Covered call ETFs can severely underperform plain vanilla ETFs in rising markets. And as you’ll see from some of those holdings, if you look at 6-month stock charts, they did just that, with some with significant losses at a time when major indexes have been rallying hard. So that high monthly income came at quite a tradeoff. Be very careful with these kinds of strategies, as over long term periods, they tend to underperform.