Don’t Keep Your Savings in Your TFSA

Why you’re missing out if you keep cash in that account.

Andrew Willis 5 December, 2023 | 4:58AM
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Andrew Willis: One financial faux pas that we continue to see here at Morningstar Canada is investors using their Tax-Free Savings Accounts (TFSAs) like savings accounts. And with the recent news that made headlines about the TFSA limit increase, we were reminded again.

Perhaps the $500 annual contribution limit increase should have been advertised differently. Because that $500 may only be around the final value if you withdrew it in the near term, for say – something you wanted to buy or as an emergency fund. Which isn’t what a TFSA is for.

It should instead have been pitched as $500 multiplied by a target growth rate, compounded over many years and then withdrawn tax-free – but that’d be one long headline. Besides, you’d also need to include the best part which is if you wait until retirement to take the money out of your TFSA, it won’t reduce your Old Age Security benefits. As of the 2023 tax year, OAS is subject to clawback on income over $86,912. That figure includes Canada Pension Plan payments. And RRSPs, which will be stealing the spotlight in the new year, can only defer taxes while their withdrawals remain fully taxable in retirement.

It's true that TFSAs don’t get the same refund as an RRSP contribution would but depending on your situation, a TFSA investment may win out when it comes time to cash out.

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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