Blessed by the Potato

As a new year rolls around, I’ve noticed a lot of questions out there about what to do about contributions to the TFSA: how much room there is, whether to contribute, what to hold, etc. I’ll try to break it down, and don’t mind going into more detail in the comments if anyone has detailed questions, but to put it very simply:

You have $5000 of new contribution room for 2010. Contribute $5000. Invest in something (TD e-series mutual funds if you don’t need the money for a decade or so, or a high interest savings account if you might need the money soon). If you procrastinated all the way since last January, then you also have your $5000 of room from 2009, for a total of $10,000 of contribution room that you should use.

That’s it, see you next year.

Seriously, it’s not that complicated — it’s certainly far simpler than the RRSPs people have been dealing with for years. There’s no need to check your notice of assessment for your contribution room, no need to figure out tax brackets and deductions, and no deadline. Everyone out there, if you have $5000 to invest, should be sheltering it in a TFSA.

There is some sidebar discussion about whether a TFSA or an RRSP is a better way to save for the long term if you only have enough money to fill one or the other. My answer, at the risk of over-simplifying, is simple: go with the TFSA. Why? Because if you screw up and need the money back, you can withdraw penalty-free* and get the contribution room back in under a year. People all too often get paralysed when faced with too many complicated decisions, so don’t sell yourself short. If you’re going to procrastinate until the end of the year over which vehicle is better for you and end up in neither, then just trust me and pick the TFSA. Perfect is the enemy of good enough.

*(though your bank may charge a transaction fee, sometimes hefty)

Note that TD does not give me a kick-back for all the referrals I throw their way but I wouldn’t mind if they did <nudge , nudge>. While it’s a bit more paperwork to set up, a self-directed TD Waterhouse brokerage account may be easier than an e-series mutual fund account since the reps actually know what it is, and it can be done in person. Both can hold the low-cost e-series index funds.