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Inside the Market Smart and not so smart things people are doing with their TFSAs as the contribution limit rises to $6,000

The long wait for a higher TFSA limit is finally over.

You’ll be able to contribute up to $6,000 to a tax-free savings account in 2019, up from $5,500 in five of the six past years. The limit was set at $10,000 in 2015, then dialled back for the next year.

The 2019 limit was confirmed by the federal government in a list of adjustments to personal income tax and benefit amounts based on the latest inflation trend. Inflation has been low in recent years, but we’ve now seen enough upward pressure on prices to trigger the higher TFSA limit.

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To mark the occasion of a higher limit, let’s look at smart and not so smart things people are doing with their TFSAs. The source of the numbers quoted here is Canada Revenue Agency’s latest data, which are for the 2016 tax year.

People are really saving money

In short, there is much more activity related to contributing to TFSAs than there is in withdrawing money.

The total value of contributions in 2016 was $54.8-billion, compared with $26.5-billion in withdrawals. A total of 113 million contributions were made in the year, compared with 19.5 million withdrawals. The average person made 14.5 contributions, and 4.8 withdrawals.

Pro tip: Keep up the great work. In a time of unprecedented acceptance of spending and borrowing, TFSAs have proven to be an effectively sticky way to get people to save or invest.

Not contributing the maximum in most cases

It is not a mistake to contribute less than the maximum. The mistake is to think you’re failing if you can’t get to the limit.

There was a lot of complaining when the TFSA limit was put back to $5,500 from $10,000 for 2016, but just 18 per cent of the total number of people who added money to a TFSA in 2016 maximized their contributions.

The cumulative total amount of TFSA contribution room available from the inaugural year of 2009 through 2016 was $46,500, yet the average fair market value for each individual who actually made a contribution was $17,286. The fair market value is a mix of contributions and gains from investment or savings. In 2016, the average unused TFSA contribution room was $27,653.

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Pro tip: Contribute the most you can to your TFSA – up to the limit – while meeting all your other financial commitments. You can always catch up on unused TFSA room in future years.

Using TFSAs more as you build wealth …

TFSA use rises as people age, and there’s a notable acceleration at age 50 if you judge by the total dollar value of contributions. The biggest TFSA users are age 75 and older, though.

To start, this group has the most TFSA holders at 1.5 million and the most total TFSA accounts at 2.1 million. The average fair market value for each person was $32,111, close to double the national average as of 2016. The fair market value of all TFSAs held by this group was $49.2-billion, or 21 per cent of the total.

People in the 75-plus cohort are very low-key with their TFSAs. Those who made contributions averaged 3.2 transactions for each person and those who took money out averaged just 2.5 withdrawals.

Pro tip: TFSAs are a great place to put money you must withdraw from a registered retirement income fund each year, but may not need to cover your living costs.

… but starting young

You have to be 18 to open a TFSA, an opportunity that many young people seem to be exploiting. There were 103,750 TFSA holders in 2016 who were under age 20, and the average value of TFSAs held by people age 20 and under was $2,998.

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Pro tip: TFSAs are phenomenally useful for millennials as a place to save for near-term goals such as travel or home-buying, and for long-term goals such as retirement investing. Parents, you can gift your adult children money for their TFSAs without any tax consequences for you.

Collecting TFSA accounts

With 13.5 million TFSA holders in 2016 and 18.3 million TFSA accounts, the average number of accounts for each person was 1.4. But a substantial number of people had way more TFSAs than that. In fact, 51,640 people had five TFSAs and 3,090 people had 10 or more accounts. Why so many? Some people may be using TFSAs to try out different financial firms or banks, or to chase interest deals on high-interest savings accounts. The TFSA limit is the limit, regardless of how many accounts you have.

Pro tip: Nobody needs 10 TFSAs. Two or three, max. The fewer accounts you have, the easier it is to mind your fees, the investments inside your TFSA and the interest rates you’re getting on savings. If consolidating TFSAs, consider a qualifying transfer (a direct transfer of your holdings) rather than making a withdrawal and then putting the money in another TFSA. There’s a risk you’ll exceed the annual TFSA contribution limit – triggering a penalty – if you withdraw money from a TFSA to immediately put into another account.

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TFSAs by the numbers

A statistical profile of TFSA ownership using the latest numbers (from the 2016 tax year)

Total number of TFSA holders 13.5 million
Total number of TFSAs 18.3 million
Average TFSAs per person 1.4
Total number of TFSA holders who contributed to a TFSA 7.8 million
Total number of TFSA holders who maximized contributions 1.4 million
Total number of TFSA holders who made a withdrawal from a TFSA 4.1 million
Total dollar value of contributions $55-billion
Average number of contributions per person 14.5
Average contribution value per person $7,014
Average number of withdrawals per person 4.8
Average withdrawal amount per person $6,488
Average unused contribution room $27,653
Average fair market value per person $17,286
Total fair market value $233-billion

Source: Canada Revenue Agency

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