Despite Widespread Belief, TFSAs Can Stay Liquid

A few weeks back, we were kind of stunned when we discovered someone in the family (Ray not to name her) had a lot of money in a savings account but did not register it as a Tax-Free Savings Account (TFSA). Interests gained in that account resulted in a juicy tax bill for her. Unnecessary because she still had plenty of TFSA contribution room available.

The money was not put in a TFSA because it was primarily used for emergencies and to pay for imminent renovations and Ray thought funds in a TFSA were not easily accessible. We checked with other members of the family and again, to our surprise, a lot of them believed TFSA money was not liquid at all. For many, TFSAs and RRSPs are all the same…money stashed there won’t be accessible till…far away retirement. So, many folks have the impression that TFSA money is tied up in some way that would prevent immediate access to their funds. But in fact, this is not true.

It’s sad because despite our financial knowledge and a lot of effort, money remains a taboo subject for many in the family. It seems like the more you are successful with money, the more people get shy and the less they are willing to talk about it. We try to remain humble about all of it, but it appears our glow still scares quite a few. These poor folks (no pun intended) prefer to keep things as anonymous as possible and give their trust to alleged advisors.    

So, another one greatly handled by so-called expert advisors. In this case, with no commission in play, the «expert» simply did not bother.

 

The Frozen TFSA Asset Misconception

Somehow, many people think TFSA funds are frozen and not easily accessible. And, despite the fact we love Disney, we are not talking about Frozen starring Anna & Elsa. And in reality, your TFSA might be more like Olaf, the chill snowman that loves and dreams about summer.

Think Twice Before Committing to The Home Buyers’ Plan

Today, we’re going to talk about one of our biggest financial mistakes over the years. It relates to the appealing Home Buyers’ Plan (HBP). Our young selves happily lunged into it acquiring our present house more than 15 years ago. At the time, it seemed like a very wise decision and the strategy provided us with a substantial chunk of change that greatly helped us in the short term. With retrospect, it now looks more and more like a very poor financial choice that considerably cost us in the long haul.

Everybody would love to, one day, have a nice home. For many, owning a big house is synonymous with financial success.

For most young folks, becoming a homeowner seems like a steep financial achievement and many may think it will remain only a distant dream. Then, they hear about the Home Buyers’ Plan (HBP) and their dream suddenly becomes more accessible. They see no-hassle free money that potentially can boost their house down payment (maybe a mistake). For some, the HBP may even provide the only cash to finance their once unattainable dream (definitively a mistake).

Fiscal Debt That Can Have Significant Long-Term Repercussions

The HBP allows you to avoid paying taxes on some RRSP withdrawals if you use those funds to buy your first house. After a two-year grace period, you have 15 years to repay your RRSP. The problem is that for most participants, the resulting tax bill will end up costing them much more in the future. The long-term implications and financial impact of that heftier tax bill cannot be ignored.

It makes no sense to withdraw from your RRSP avoiding only a 25-30% tax bill and later, to repay your RRSP with an ensuing 45-50% tax cost.

Fixed vs Variable Mortgage Rate Mistake

In the fixed-versus-variable mortgage rate debate, one cannot argue that historically, variable rates have been a better long-term option. There’s still some risk associated to the variable option if interest rates happen to rise. With the fixed option, you are basically offered to pay a premium to kind of take out that risk.

But things are not that simple and obvious. In practice, rates would have to rise fast and rise a lot to really hammer down the variable option and make it the worse choice. In the end, in most cases, the fixed rate premium may simply be too costly. At least, that’s what we learned from our personal experience.

To make a long story shorter, we started our mortgage life using the optimal variable-rate option for the first 5 years. In 2006, we switched to a fixed rate afraid of a hike. In fact, that dreaded eventuality only manifested itself timidly more than 10 years later, in 2017. Choosing the fixed option was a mistake. That huge misstep cost us about 10K$ only in interest in the following 5 years. Because the amazing power of compound interest works both ways, our mistake surely cost us thousands more since then.

Drawing conclusions may be easy after the fact, but this is a classic case where your emotions get in the way of sensible financial decisions.

In late 2010, we were already convinced about Variable Rates being The Right Long-Term Choice For Our Mortgage yet we struggled and still made what appears like the safer choice locking in a fixed rate for 5 more years.  With retrospect, that decision was not as bad because the spread between variable and fixed rates remained much smaller. In the end, it looks like it will cost us only a couple hundred dollars more.

The great news is that our mortgage is now virtually paid off, eliminating additional opportunities to make the same mistake again and again.

Still on the bright side, we are doing very well financially despite several mistakes of the same magnitude. It looks like it's not about being perfect, but rather more about learning, working thru it and being good on average. 

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