TFSAs aren’t for saving

RRSPs get all the investor attention this time of the year, and they shouldn’t

Andrew Willis 20 February, 2020 | 1:24AM
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This article is part of the Morningstar Retirement Week special report

Andrew Willis: TFSAs, or tax-free savings accounts have been marketed incorrectly since their inception. They aren’t for vacation savings, an emergency fund or even other short-term investments, and if that’s how you’re using your TFSA, you’re missing out on the magic power of compounding interest.

There is no other place you can grow your money tax-free, and also withdraw it tax-free in the future. It’s an ideal investment account, says Jackie Porter, Financial Planner at Carte Wealth Management. RRSPs on the other hand defer taxes but are fully taxable in retirement – alongside all other forms of income in retirement, such as Old Age Security (OAS) and Canada Pension Plan (CPP).

And speaking of the OAS, all other income will impact your ability to receive OAS benefits if the income is over $79,000. But if a percentage of your income originates from your TFSA, you may be able to bypass the clawback altogether since it wouldn’t be reported on your tax return, Porter points out.

In other words, unused TFSA contribution room is a missed opportunity to invest with unrestricted gains for when you need income the most. Even without the ability to defer taxes, TFSAs can be a powerful investment account to withdraw funds from in the future. This year think of your taxes owed on your TFSA contribution as an investment.

And before you buy holdings, consider your risk tolerance and a variety of asset classes, and target long-term compound growth.

For Morningstar, I’m Andrew Willis.

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About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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