Monday, February 5, 2018

Puzzling TFSA Advice

I often see advice related to TFSAs and RRSPs that is strange or just plain wrong. I hate to pick on Gail Vaz-Oxlade, but her recent article giving TFSA advice was spot-on except for one puzzling part I didn’t agree with:

You can hold any investment you can buy for your RRSP inside your TFSA, including stocks, bonds, GIC, and mutual funds. But you should probably stick with interest-bearing investments.

Why? Well since all the capital gains inside [a] TFSA [are] tax free, it also means any capital loss can’t be claimed [to] offset your other capital gains.

To start with, your mix of investments in cash, bonds, and stocks should be based on personal factors that have nothing to do with the tax properties of various types of accounts. Because few people use up all of their RRSP and TFSA room, all of their savings outside of a chequing account should be in either RRSPs or TFSAs.

If your asset mix includes $50,000 in cash, perhaps as emergency savings, and you have no savings in non-registered accounts, then by all means keep the $50,000 in a TFSA. But don’t bias your asset mix to extra cash just to avoid investing in stocks in a TFSA. More cash in your TFSA should mean less cash or cash-equivalents in your RRSP.

If you’re in the enviable position of having used all your RRSP and TFSA room, you get to decide what part of your savings should go in a non-registered account. Suppose your asset mix includes at least $50,000 cash and $50,000 in the Canadian stock exchange-traded fund VCN. The question is which to hold in your TFSA and which to hold in a non-registered account.

The best savings account I'm aware of pays 2.3% interest. VCN pays more than this in dividends, but dividends have preferred tax treatment in a non-registered account. Ignoring capital gains for the moment, paying taxes on 2.3% interest in a non-registered account isn't much different from paying taxes on the VCN dividends in a non-registered account.

The choice of which investment to hold in your TFSA comes down to the capital gains. Over a single year, VCN may be up or down, but over decades, it’s far more likely to be up than down. It’s better to get your capital gains tax-free than it is to worry about keeping your capital losses. If getting capital losses over the long term is likely, then you should re-evaluate the way you invest.

20 comments:

  1. I think the biggest problem the TFSA has is that it is a Tax-Free Savings Account, so many people seem to think of it as ONLY a HISA, although Gail's advice is a bit odd. Curious to see if she comes by and comments.

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    1. @Alan: Yes, many people aren't aware they can invest in stocks and binds within a TFSA. Then there are those who recommend against doing so. My own TFSAs are 100% stocks.

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    2. I had the same issue with a Quebec blogger ("eille la cheap") who insisted a TFSA was for short-term savings only. When I suggested she re-think this, she said she had it all validated by accountants, and besides, the name says it all "Savings Account". By the time I found a few links to blog entries from the bank that was sponsoring her that explained how TFSAs worked for all investments, she lost her cool and deleted my posts and banned me. Her bad advice is still up there.

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    3. @Anonymous: There's no shortage of bad advice available. I do my best to get things right, even if it means criticizing my own past ideas.

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  2. Is it a context thing? For me, Gail Vaz-Oxlade's audience are those in debt or just clearing their debt. Namely continuing from her shows.

    On the other side of things, I read somewhere for the first $1000 of your TFSA, you should swing for the moon, penny stocks, speculative tech. Because if you win .. you win. Otherwise $1000 doesn't really mean all that in grand scheme of your savings. [No, I did not do this, but I do think the logic is fairly sound.]

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    1. @aB: It's true that her audience are those in debt, but they wouldn't be worried about preserving capital losses, so I'm not sure how her advice applies.

      Investing $1000 in penny stocks is better than investing all of it in penny stocks, but even better is avoiding penny stocks altogether. The soundness of the logic I see is if you're trying to do a small dumb thing instead of a big dumb thing.

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  3. I think Gail Vaz-Oxlade provides excellent guidance and advice regarding budgeting and debt management. That being said, I have found her knowledge and advice on investing and taxes to be lacking on a number of occasions. Unfortunately, have found that in a number of cases with those that are Personal Finance generalists, that they (and the media) regard themselves as experts in all areas including investing and taxation. They have just enough information and knowledge to be dangerous, those that follow them would be better served if these "experts" stuck to their areas of expertise.

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    1. I agree. In her book "Money Rules" (which otherwise contains decent advice), she claims that high MER mutual funds are worth it if they have above-average returns (rule #161). Sure the match checks out but just try to buy a fund that consistently beats a comparable index after fees are considered.

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    2. @Anonymous and @G: Agreed. I've learned a lot from Gail about how to help people who handle money poorly. But I've disagreed with her on other subjects.

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  4. I wouldn't feel too bad picking on Gail Vaz-Oxlade, she deserves it from time to time. Her expertise is more in money/spending psychology than finance/investing and she is largely an attention seeking celebrity type.

    I once gently tried to correct an error Vaz-Oxlade made about RESP withdrawals in a comment on her blog and she responded in all caps asking how dare anybody question her knowledge ("I’m curious, do you think I just made up the RRSP bulletin I posted above? Really?"). She never acknowledge her error or corrected her blog post and it's still up there misleading people almost 8 years later with the correct information hidden 2/3 of the way down in the 76 comments. http://gailvazoxlade.com/blog/archives/2190

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    1. I agree generally, but I think saying "she is largely an attention seeking celebrity type" is harsh. She has done a lot of fighting with those who defend debt culture, but she sometimes goes into fight mode with the wrong people.

      I've read your exchange with Gail over RESP rules before. To be charitable, her reaction was puzzling. My career in hi-tech made me used to dealing with people who are very useful in one area and much less so in others.

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    2. Yeah, maybe I'm a little harsh. If only she would correct that blog post as many people trust her advice. Ms. Vaz-Oxlade if you are listening, better late than never :).

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    3. Wow, she is so wrong. I think she fails to understand what EAP actually consists of. Greg is absolutely correct.

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  5. Words to live by: If getting capital losses over the long term is likely, then you should re-evaluate the way you invest.

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    1. @Stephane: Glad you liked that one. It felt right as I wrote it.

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  6. Greg, I remember that post and remember especially the venom that was spewing out from her. She should be embarrased for how she responded to you, especially since she was so much in error of the facts.

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  7. Puzzling, for sure. My TFSA is loaded with 100% equities. All my bonds are in RRSPs.

    Pretty simple.

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    1. @R: The correct mix of assets in each type of account can vary from one person to another. It's clear that blanket advice to all to void equities in TFSAs isn't right.

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    2. Hi Michael,

      Curious why you'd say that? If someone has a long time-horizon (25+ years in my case), wouldn't going long on equities be the best way to go?

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    3. @R: Things vary from one person to another. You identified one reason for not owning stocks in a TFSA -- having a short time horizon. Someone who expects to have a much lower tax rate in retirement might prefer stocks in RRSPs and bonds in TFSAs to get a better tax advantage on the greater RRSP growth. The claims that we're all individual snowflakes are often overdone, but there are a number of broad categories of personal situations that call for different strategies.

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