If you’re hitting 50 and staring down your Tax-Free Savings Account (TFSA), you’re not alone in wondering how much should be sitting there. After all, the funds held in a TFSA provide tax-free growth over the long term, a huge benefit for retirees, when it actually comes time to start pulling money out of one’s retirement funds.
Here are a few facts about the average TFSA balance for Canadians at age 50, what it should be, and pitfalls to consider (so they can be avoided).
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Average TFSA at age 50
Recent Canada Revenue Agency (CRA) data paints a sobering picture. The typical 50-year-old Canadian has around $30,000 in their TFSA as of the 2023 tax year, though some estimates peg it closer to $25,000-$30,000 depending on the cohort.
What’s important to consider about this number is that it’s inclusive of all the capital gains investors have seen over the past 15 years (since the inception of the TFSA). In other words, the amount of invested capital Canadians have collectively put to work in this powerful retirement savings vehicle is far lower than that number, considering the reality that the TSX is still hovering around an all-time high.
Of course, life often gets in the way of putting capital to work in one’s TFSA within a given year. Whether we’re talking about mortgages, kids’ tuition, or emergencies, it doesn’t matter. That said, this number clearly indicates that the average 50-year-old Canadian is leaving some serious money on the table.
Averages get skewed by maxed-out high earners, so if you’re below this, don’t panic. Putting capital to work consistently in a TFSA can still provide excellent compounding in the long term.
What it should be
Aim higher, friends — way higher. If you’d maxed contributions since 2009 and earned a modest 5% annual return, your TFSA could be around $160,000 today.
That’s the opportunity cost of underusing this powerhouse. The sort of permanent tax-free growth investors can receive in a TFSA with no OAS clawbacks on withdrawals makes it the perfect account to be used for retirement bridging.
For a comfortable nest egg, most personal finance experts suggest Canadians target at least $100,000-$150,000 by 50 if you’re eyeing retirement at 65. That’s assuming investors pair this vehicle with savings in other funds, such as Registered Retirement Savings Plans, as well as government benefits such as the Canada Pension Plan and Old Age Security.
I’ve long been of the view that investing in quality dividend growers like banks or utilities makes the most sense, particularly for those becoming more risk-averse as they age. But you do you.
Pitfalls retirees must dodge
Don’t sabotage your golden years with avoidable TFSA traps. Over-contributing tops the list. Indeed, CRA slaps a 1% monthly penalty on excess, and the withdrawn room doesn’t reset until next year.
That means for those who replace $20,000 mid-year, there’s the potential you’re going to sit in the penalty box until January. Same-year re-contributions catch tons of folks off guard.
Another key pitfall I’ve seen a lot of discussion around is day trading within a TFSA. That’s because the CRA views frequent buys/sells as a business, taxing gains. For those with foreign dividends, it’s important to consider that such holdings can spark withholding taxes that don’t get clawed back.
Another key tip is to consider designating a successor holder (spouse only), not a beneficiary, to avoid a probate mess. There’s a lot to consider here, but the bottom line is that a TFSA is a powerful vehicle that more Canadians should utilize to its fullest potential, and do so right now.
