Nov 142012

With November being financial literacy month here in Canada, I was asked to post my best financial tip. After hours and hours of combing through the archives of The Loonie Bin, I have decided that learning to maximize your TFSA is probably one of the smartest decision a person could ever make.

We’ve all heard about them yet year after year, Canadians still haven’t figured out how the TFSA actually works. The problem I see is in the name. Calling it a “savings” accounts gives people the impression that it’s to be used like a normal savings account. In fact, I remember the original government website said that a TFSA is perfect for saving for a trip, home renos or for that new car. While it’s important to save for those kinds of expenses, a regular savings account would work just fine for short term financial goals. To truly get the most from your TFSA, you have to think more long term.

Tax Free Income

 I opened a TFSA in 2009 and the interest rate the bank promised me was 1.5% on my $5000 contribution. I was paid $75 in interest and did not have to pay any taxes on that amount. $75 is not a whole lot of money, in fact, the 1.5% interest rate didn’t even cover the inflation rate which averages 2-4% every year.

Frustrated, I decided to invest my money in stocks rather then rely on pitiful interest rates from the bank. I opened a self directed TFSA trading account and transferred my $5075 into it. In 2010 I contributed another $5000 and purchased 200 shares of Enbridge stock. That year I was paid $340 in dividends AND the stocks also increased in value by $1142. Sure the stock could have gone down in value, but the dividends still paid me a return of 3.4% regardless of the stock value.

Each year I kept contributing $5000  into my self directed TFSA trading account and invested it in common shares of dividend paying stocks. I would also re-invest the dividends to buy even more dividend paying stocks. The more dividend stocks I purchase, the more dividend income is deposited into my account each year. As of 2012 I have contributed the full allowable amount of $20,000. The total value of my TFSA account is now over $27,000 and it makes me over $1000 a year in dividends. If I would have kept the low interest bank account, the value of my TFSA would be $20,700.

Growing Returns

As I mentioned before my yield on cost of my initial investment was 3.4% when I first opened my TFSA trading account. The stocks that I invested in over the last few years have also increased the dividends they pay out. My current yield on cost is 5% thanks to dividend increases. As I add more stocks that keep increasing their dividends, then my yield on cost or return will keep increasing.

What About Risk?

 Investing in stocks may seem like a risky venture but it doesn’t have to be. I like to invest in blue chip stocks like Canadian banks. Some have been around longer then Canada has been a country which means they are not going anywhere anytime soon. They also increase user fees all the time so their profits will almost always be up. No matter if the stock price increases or decreases, as long as the dividends keep coming into my account I’ll still be making more money then the low interest bank accounts.

 Emergency Fund

With my current strategy of investing in common share dividend paying stocks, I can withdraw the dividends without paying any taxes at any time. If I ever need some emergency money I can just withdraw the dividends without having to sell any of the stocks. I would rather re-invest the dividends, but it’s nice to have the option for emergencies if it’s needed.


My ultimate goal is to use my TFSA to generate a TAX FREE income that I can use when I retire. The money I withdraw from my TFSA does not count towards any other income I may make nor does it effect the amount of old age security I could receive when I’m 67.

Just imagine what kind of income you could generate if both spouses regularly contribute to a TFSA and follow this strategy. So far it’s working great for me and I hope my personal experience helps you to make the most of your TFSA!
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 Posted by on November 14, 2012

  20 Responses to “My Best Financial Tip: Maximize Your TFSA”

  1. Found you via Life Insurance Canada. Do you favour TFSA to RRSPs ? My understanding is if you have to choose one or the other TFSA`s is better for low to middle income, RRSP`s are better for higher incomes.

    • Thanks for stopping by, Mandy!

      I personally prefer the TFSA over the RRSP because even though you defer taxes with an RRSP, your always on the hook for paying them. I would rather pay the taxes now because you never know how much they could increase in the future.

  2. […] The Loonie Bin – Maximize your TFSA […]

  3. As a student, I only have the means to fill my TFSA each year and don’t really have any RRSP room anyways (no income). Since I’m only using my TFSA I’m only investing in Canadian companies. Do you think this is a problem?

  4. […] Best Financial Tip: Maximize Your TFSA @ The Loonie Bin […]

  5. […] from the loonie bin blog says to maximize your […]

  6. […] Maximize your TFSA (The Loonie Bin Blog). […]

  7. Great post, thanks! What do you mean by a self-directed trading account and where can you get one?

    • Sorry for not responding sooner, I’ve been on the road and the wireless internet has been terrible!

      A self directed TFSA trading account is aquired from a discount broker. I use TD waterhouse and I think the TFSA was free when I opened it in 2009. You have to pay a broker fee to buy stocks but it’s nothing compared to what mutual funds ultimately charge you in the end.

      Some discount brokers charge a maintenance fee every year unless you have a minimum balance. A friend of mine opened one at RBC and they charged him a yearly fee unless he had a $15,000 balance.

      Check with your bank if they have a discount broker and ask about the fees. I called and made an appointment and they did all the rest. Hope this helps!

      You can email me if you have any other questions.

      Thanks for stopping by!

  8. Hi, great post! My question is the same as “Lookikg for advice”. Where did you open self-directed tfsa?
    I am looking for one, but it is confuzing.

  9. Hi there, great post. I found this page through google and somewhat got my answer. Taking your example, if the value of your TFSA trading account is 27,000 in 2012, and you contributed 20,000 (the max available), does this mean in 2013, you can or cannot contribute the allowable 5,500?

    I’m thinking you can since it’s the contribution amount they’re concerned with.

    I’m tax concerned since the value of my TFSA is currently at 23,000…would I only be able to top it off to 25,500 or put in another 5,500 for the year to bring my TFSA up to 28,500?

    Thank you so much in advance. Keep up the good work.

    • You are correct Ian.

      As of 2013, you are allowed to have contributed a total of $25,000 even if your previous contributions have increased in value.

      For example:

      Jim’s TFSA is worth $34,000 even though he only put $20,000 into it. He is still able to contribute $5,500 for 2013 without any penalties which would bring his total TFSA amount up to $39,500. The extra $14,000 he made in his TFSA never impacts his contribution limit.

      Hope this answers your question!

  10. First 2 years tfsa was locked in at 4.25 and 3.8%
    now in vanguard etfs is ths a good mix?

    • Hey CB,

      I’d say you’ve got a good mix going. ETFs are an excellent way to diversify your portfolio without having to spend much time worrying about. Hopefully they will do well for you!

  11. Steve I own 5% of the shares in a company that is a holding company in Bermuda with operations in Mexico, USA and Canada can I place these shares in my TFSA if so how would I go about doing so? Since this is a new start up how would I determine the value of the shares for CRA purposes? Thanks for any help you can be.

  12. Just what I needed to here! Just setup my meeting to open my self directed tfsa account this week!

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