The article “Should Partners Combine Their Finances Before Marriage?” was originally published on MoneySense on July 19, 2019.
Mathew wants to help his girlfriend kickstart an investing plan. Is gifting money for her TFSA a good idea?
Q. Should I gift my girlfriend of two years money to put in her Tax-Free Savings Account (TFSA)? She’s almost finished paying off her student debt, and I’d like to help her start investing with a $6,000 TFSA contribution. We’re both 30 years old and plan to move in together next year. What are the pros and cons of doing this, and how can I do it right?
A. Tax-Free Savings Accounts (TFSAs)* can be a great way to save. There are many factors to consider, and the answer to your question depends on your girlfriend’s specific circumstances.
If your girlfriend’s income is lower now than she expects it to be in the future, Mathew, a TFSA may be a better option than investing in a Registered Retirement Savings Plan (RRSP)*.
RRSPs give a bigger bang for your buck when your income is higher, and you are in a higher tax bracket. That’s because RRSP contributions are tax-deductible, and higher income earners therefore get higher tax deductions and more tax savings. Higher income earners are also more likely to be in a lower tax bracket in the future—usually in retirement—when they take withdrawals from their accounts. TFSAs can be more flexible for young people in terms of withdrawals, which are tax-free, while you are required to pay tax on withdrawals from your RRSP. Your girlfriend can even make RRSP* contributions from a TFSA* in the future, when her income rises and she wants to take advantage of the RRSP tax break.
However, if your girlfriend’s employer offers a group RRSP or a defined contribution (DC) pension plan that has matching employer contributions, I might opt for this as her savings vehicle of choice over a TFSA, as participating will allow her to access free money in the form of employer contributions.
If the two of you expect to buy a home in the next couple of years, you may want to consider the benefit of the RRSP Home Buyers’ Plan (HBP). The HBP allows tax-free withdrawals of up to $35,000 towards the purchase of an eligible home.
If your girlfriend has no company matching contributions, is in a low tax bracket, or you do not expect to buy a home for a while, these are all reasons I would choose a TFSA over any other investment option.
That does not mean I would choose a TFSA over any option though, Mathew. The federal student loan rate is currently prime + 2.5%, or 6.45% in total. Provincial or bank loan rates vary but are high enough that debt repayment may be a better option than investing.
If her loan is a federal loan at 6.45 percent, she would need to earn more than that to be better off investing in a TFSA. At age 30, you may have seen a pretty good run for stocks over the past 10 years of your investing experience. But beating 6.45% would require a high level of risk and exposure to stocks, as well as low fees to exceed that threshold.
If she is a new investor, a 100% stock portfolio may not be appropriate; and if you guys are saving up for short- or medium-term expenses, such as a home, wedding or kids, that would shorten your time horizon for investing. A short time horizon makes investing in stocks—which can be volatile—less appealing. You want to be sure your girlfriend can access her money when she needs it, without risking a decline in value.
So far, I have only commented on the investment and tax considerations. Mathew, I would be remiss to ignore the risk of you breaking up with your girlfriend and what that might mean if you give her money to put in her TFSA.
Common-law division of property upon separation varies from province to province, but you guys are not even living together yet. If you give your girlfriend $6,000 to put into her TFSA*, and you guys split up, it is hard to say whether you would get that money back. She may or may not want to give it back, and you may or may not have recourse. Or, that recourse may or may not be worth the aggravation or potential legal fees.
If you become common-law or get married and then split up, that could make this gift even murkier to address.
I do not mean to be a pessimist, but given the statistics on divorce, I would say there is more than a 50% chance that you and your girlfriend of two years are not going to be together forever.
Your intentions may be good, and you may get married and live a long, happy life together; but at the very least, you might consider loaning her the money for her TFSA contribution, even if it is at 0% interest. That might at least protect the initial principal.
The best option may be just to let her finish paying off her student loan, and then start slowly building her TFSA with your help, Mathew. The more prudent “help” may be where to open the account, what to invest in, etc., as opposed to giving her your money to invest, particularly given you probably have TFSA and RRSP room of your own.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.