No, Your TFSA Still Isn’t For Saving

This is why you’re missing out if you’re only holding cash.

Andrew Willis 1 March, 2022 | 2:21AM
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Andrew Willis: Perhaps you’ve been focused on your RRSP so far this year ahead of the contribution deadline. But if you haven’t made the most of that TFSA room by now you’re probably not making the most of it.

This form of tax-advantaged growth is a Canadian favourite, but not entirely for the right reasons. A lot of people see the word ‘savings’ in TFSA and they think it’s a great place to park some cash for a financial goal or a rainy day. 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 OAS, the money you take out of your TFSA won't reduce the OAS benefit you receive - like what happens with other types of income. And this is key because any income that you make over a certain amount - this year is around 81 thousand - could be subject to recovery tax. And that would be a guaranteed loss.

So while you’re not getting money back on your next tax return for your TFSA contributions this year, you’ll be getting the ball rolling on gains that are probably much greater come retirement.

For Morningstar, I’m Andrew Willis.

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Security NamePriceChange (%)Morningstar Rating
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About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar.ca. Follow him on Twitter @AndrewWillisCDN.

 

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