As we begin the new year, it’s natural to start thinking about what the future holds and how we can set ourselves up for financial success in the year ahead. If you’re an investor with a Tax-Free Savings Account (TFSA), you may be wondering how recent changes in the financial landscape will impact your investing strategy in 2023. In this blog post, we’ll explore some of the key factors that may influence your TFSA investing decisions in the new year, and provide some tips on how to adapt your approach in light of these changes. The TFSA is a powerful tool that can help you grow your wealth tax-free, but it’s important to stay up-to-date with the latest developments and consider how they may affect your investing strategy. We’ll examine the potential impact of rising interest rates, changes to tax laws, and other factors that may influence your approach to TFSA investing in 2023.
Interest Rates & Savings
Interest rates have increased significantly over the past year, and this has had an impact on two of the four financial strategies mentioned. In 2021 and early 2022, savings account rates at traditional banks were almost non-existent, but this changed in March when the Bank of Canada began to raise interest rates. Now, some institutions are offering promotional rates of 5% or higher, and regular high-interest savings account rates at online banks are typically in the range of 3-3.5%. These interest rates are higher than they have been at any point since the Tax-Free Savings Account (TFSA) was introduced in 2009. It’s worth noting that the amount of tax paid on savings account interest can be over 50%, depending on the saver’s income and location. Considering using a TFSA account to earn this interest may be a good option to minimize tax liability.
Factoring In Attractive Stock Pricing
Although it’s worth considering both options, there is currently a good opportunity for long-term investors to purchase stocks at a discount. 2022 was a difficult year for stocks, with the S&P 500 returning approximately -12% for Canadian investors, the TSX returning around -6%, and developed markets outside of North America experiencing losses of about 10%. While it’s uncertain whether stocks will increase in value in 2023, North American stock markets are currently trading at prices seen in June 2021. Investors with a long-term outlook or the ability to gradually buy stocks over the course of 2023 may stand to benefit in the long run.
Should Your Focus be On Debt Payment
Because mortgage interest rates were so low for an extended period of time, it may not have been a priority for some people to pay off their debt. However, now that big bank rates are around 6%, those with Tax-Free Savings Accounts (TFSA) should reconsider their saving and debt repayment strategies. For a TFSA investor to benefit financially from not paying down their debt, they would need to earn a higher return on their TFSA investments than the interest rate on their debt. While an aggressive investor with low fees may still come out ahead in the long run, a conservative investor or someone with unsecured debt may find it more difficult to come out ahead. It’s worth noting that unsecured lines of credit may have interest rates above 10% and credit card rates could be as high as 18-30%.
If an investor has debt and is deciding whether to pay it off or contribute to their Tax-Free Savings Account (TFSA), this may be a year to consider whether taking a guaranteed return equal to their interest rate is a better option than investing in their TFSA. If an investor has a TFSA balance that they are considering using to pay down debt but are hesitant to do so all at once, they could gradually reduce their balance over time rather than making a large one-time payment. Homeowners with a low fixed-interest mortgage that is due for renewal in the coming years may be able to earn a higher return on a savings account or Guaranteed Investment Certificate (GIC) than their mortgage rate, so they may want to wait until renewal to pay off their mortgage.
How Tax-Free First Home Savings Account Affects Your TFSA
The Tax-Free First Home Savings Account (FHSA) will be introduced in 2023 and accounts are expected to be available in April. The FHSA operates in a similar way to the Tax-Free Savings Account (TFSA), in that investments grow tax-free and withdrawals can also be taken without any tax payable, as long as the funds are being used to purchase a qualifying home by a first-time homebuyer using an FHSA. One advantage of an FHSA over a TFSA is that contributions to an FHSA are tax deductible. This means that up to $40,000 in contributions to an FHSA account can be claimed as deductions to reduce taxable income and generate tax refunds on a contributor’s tax return. In contrast, contributions to a TFSA are made with after-tax dollars, so there are no up-front tax savings. TFSA investors who plan to buy a home within the next 15 years – the time limit for an FHSA account to remain open – may want to consider using their TFSA savings to contribute to an FHSA.
Bill C-32 was given royal assent on December 15th, but not before an interesting change was made to the bill. The amendment allows first-time homebuyers to use an FHSA account in conjunction with a withdrawal from a Registered Retirement Savings Plan (RRSP) under the Home Buyer’s Plan (HBP). This was not the original plan when the FHSA was first introduced in the federal budget. Now, individuals can withdraw up to $35,000 from their RRSP through the HBP and also contribute up to $40,000 to an FHSA, with unlimited withdrawal privileges from the FHSA. As a result, those aspiring to become homeowners and who have RRSP balances nearing $35,000 may want to consider focusing on contributing to an FHSA instead of a Tax-Free Savings Account (TFSA). It is crucial to regularly review and revise financial plans to ensure they suit your personal circumstances and objectives. Whether or not to alter your TFSA planning is dependent on your specific situation and is worth reevaluating.
In conclusion, it’s clear that the financial landscape is constantly evolving, and it’s important for investors to stay on top of the latest developments and consider how they may impact their strategies. If you’re an investor with a Tax-Free Savings Account (TFSA), it’s a good idea to take a fresh look at your investing approach in light of recent changes such as rising interest rates, changes to tax laws, and other factors that may influence your decisions. By staying informed and adapting your strategy as needed, you can make the most of your TFSA and work towards your financial goals in the new year.
