TFSAs (Still) Aren’t For Saving

RRSP season may be over, but one of the best investment vehicles is always available

Andrew Willis 1 March, 2021 | 4:28AM
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Andrew Willis: If you haven’t already maxed out this year’s Tax-Free Savings Account – or TFSA – contribution room, you might be missing out on some great tax-advantaged growth!

A lot of people see the word ‘savings’ in TFSAs and the first thing they think is that it’s a place to sock away cash for things like a vacation, or a rainy day fund. Kind of like a regular bank savings account. But they’d be wrong.

The TFSA is an ideal investment account, especially if you want the magic power of compounding interest. There is no other place you can grow your money tax-free, and also withdraw it tax-free.

RRSPs on the other hand defer taxes but remain fully taxable in retirement – alongside all other forms of income in retirement such as Old Age Security and Canada Pension Plan.

And speaking of Old Age Security, the money you take out of your TFSA won't reduce the Old Age Security benefit you receive - like what happens with other types of income. Without a long-term nest egg in your TFSA, you might find yourself having to give back any amount you earn over $79,845.

In other words, the unused TFSA contribution room is a missed opportunity to invest in unrestricted gains. 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 the taxes you don’t get back from your TFSA contribution as part of an investment.

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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