Tax Free Savings Accounts (TFSAs) allow you to shelter investments from tax so they can grow tax free. Presently, you get $5,500 annually in contribution room, starting at age 18, which is indexed to inflation and increases over time. It can be a really powerful investing tool if used properly. Unfortunately, according to both The Financial Post and Mackenzie Investments, many Canadians don’t understand how they work.
With a few ideas in mind, you can make the most out of your TFSA accounts.
TFSAs are not Just for Savings
Your TFSA can hold nearly any investment type you would hold in any other investing account. TFSAs can hold stocks, bonds, GICs, mutual funds, ETFs and so forth. The name of the account, involving the word savings can throw people off. Don’t let it fool you. You want high return investments in this account, growing as much as possible. Using it as a high interest savings account, while beneficial to the banks or for short term savings, is not its best use.
TFSAs should be Considered Alongside your RRSP
When creating an investment strategy, generally you want to think about your entire portfolio of holdings, across all accounts. The TFSA can absolutely be used to cover medium term saving targets like a car, or longer term ones like mortgage payments, but in its ideal, it should be used for long-term investment growth.
TFSAs are Versatile
With an RRSP, excluding the Home Buyer’s Plan, if you withdraw money, that contribution room is gone forever. With contribution room in a TFSA, this is not quite so. Any contribution room for money withdrawn is reassigned in the next calendar year. If you withdrew $1,000 in 2016, contribution room worth $1,000 will be available in 2017, alongside the new annual $5,500 in contribution room.
The TFSA is one of the most versatile long-term investment accounts we have in Canada. Unlike the RRSP, the TFSA has no impact on your taxable income and there are no penalties or tax consequences for withdrawing. Use it for the long term and use it wisely. It can absolutely help you meet your investing goals if you use it for high growth, long-term investments, like a market index fund.