TFSA Flexibility: Good or Bad?

The biggest perk of a TFSA? You can take money out anytime, tax-free. The biggest downside? You can take money out anytime, tax-free. If you don’t refill it, you’re missing out on serious long-term growth.

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  You and I both love TFSAs.

Correct.

And I’ve always said to people, if you’re maximizing either one of these, let’s say you can only do one, we’re thrilled.

And let’s not get too caught up in the nitty gritty of which one’s better. But I do think that RRSPs are getting hit a little bit too hard now from some people who haven’t thought through the math like you and I have. So hopefully we help them to see it a little bit differently. I will ask you one more question.

Do you worry? With the TFSA that people are more inclined to go in and grab money out of it for a trip or whatever else they’re less likely to do that with the RRSP where they have to face the tax consequences immediately.

Yeah, that’s a great point. So, one of the major benefits of the TFSA, of course, is the flexibility that you have with it, right?

With the RRSP, as you point out and here’s another misconception. There’s no penalty for withdrawing from the RRSP. You’re not penalized. You just have to pay the taxes. Right? So you have to pay the tax. Uh, and that is a massive barrier to access of your RRSP, which can be certainly a good thing. And the TFSA, to your point, you can take it out at any time.

And not only that, you don’t lose the contribution room. With the RRSP, you take it out, you lose the contribution room forever. With the TFSA, you take it out, not only is there no tax, but you get all that contribution room back the next year. Right? Major benefit if you can behave and so a lot of people to your point I think will use the TFSA as the first place they go to get money when something comes up and maybe that encourages some people not all but to spend more than they should or or need to Because it’s a readily available source of tax free income, right?

So to your point now that new car that new trip, whatever it is now many of these people will do that and then promise themselves. They’re gonna refill it the next year by over saving And if you know much about how people behave with their money, it rarely happens, right? Um, so I, I think the flexibility of the TFSA is a double edged sword and that it can be a massive benefit when used effectively.

Um, it, it’s like debt, right? I have clients where it’s like, Hey, you need to pay off that line of credit. And they’re like, okay, we’re going to do that. I’m like, but if you’re going to pay it off only to borrow it back and spend more later, then we’ve got a real problem. You need to pay it off and close it, you know, cause you’ve got a spending problem.

With the, uh, the TFSA is a similar kind of frame of mind. If you need to dip into it, great, but you got to make sure you refill it, right?

Very, very well said.