Play a Game You Can Win: TFSA’s

A bouncing baby TFSA

A game you can win

Introduced in February of 2008, Tax Free Savings Accounts (TFSA) represented the biggest change to Canadians’ personal finances in many years.  Here, suddenly, was a vehicle that seems to be (and in my opinion really is) an investor’s dream: a way to invest money, and never be taxed on it; a vehicle that allows people to withdraw money at will, and then replace it again in future years (again, without tax consequences); a vehicle that is open to everybody over the age of 18, regardless of income; a vehicle whose contributions room increases every year, even when a person reports no earned income.  These are all great feature of the TFSA, but their biggest advantage may be the low annual contribution limit.  The low limit allows people to max out their contribution, and feel like they have control over this part of their lives.  The idea that you’ve done all that you can do, that you’ve won the game you are playing, is highly motivating; it makes people want to play again and again.

The power of positive reinforcement

Most people consider the relatively low annual contribution limit a fly in the ointment of the TFSA.  It’s true that the contribution limits for TFSA’s are much lower than they are for RRSP’s.  While your yearly RRSP contribution limit is the lower of 18% of your yearly earnings, or $23,820 (2013) TFSA contribution limits as of 2013 are set at $5,500 annually.  At first blush, the relatively low contribution limit may seem a weakness in this particular vehicle, but consider this:  If person A is trying to lose 20 lbs, and person B is trying to lose 80 lbs, who would you bet on getting frustrated and quitting before achieving his goal?  The fact that TFSA contribution limits are so much lower makes them much more attainable for the vast majority of people.  It is simply far more likely that a person will be able to contribute the full amount to a TFSA than it is that a person will be able to contribute the full amount to an RRSP.  Success breeds success, and once you’ve maxed out the contribution room of your TFSA one year, I bet you’re going to try hard to do it again next year.  And the year after that.  Of course it is possible to contribute less than the full allowable amount to an RRSP, but how many people do you figure look at their RRSP contribution limit for any given year, roll their eyes, and simply forget about playing a game they know they can’t win?  According to the Globe and Mail, more than 50%.

There are lots of factors to consider when choosing investment and savings vehicles.  The psychological boost one gets from setting and then achieving goals is among the more important.


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