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Blog Post: Tax Free savings accounts (TFSAs)  Thumbnail

Blog Post: Tax Free savings accounts (TFSAs)

 By Meghan Gould

November is financial literacy month and so now is a great time to discuss the TFSA or as I wish they’d named it the TFIA (Tax Free Investment Account).

These accounts have been around for over a decade but the level of misuse is quite high.  That’s not your fault. The vast majority of us didn’t get a financial education over and above our parents or grandparents giving us a small allowance or some birthday money and extracting a promise not to spend the entire thing on candy. The caveat of ‘today’ is something I always added in my head to that promise.

You may have been lured into the bank’s promise of a whopping 1.75% interest rate on your TFSA, and have even started a regular contribution plan to it. We’ve all heard that cup of coffee or avocado toast guilt trip i.e. you save that daily coffee trip budget in your TFSA and eventually you’ll have a lovely pool of money to spend.

And that’s a great way to start saving. But it’s not the whole truth.

 

The TFSA is at it’s best when you use it not as an average savings account to see how interest works, but as an investment tool. The wonderful ‘tax free’ component works by shielding whatever is inside it from tax.

E.g.

You earn 1.75% on $10,000 for a year you don’t pay any tax on that $175 income.

Or

You invest in a stock or ETF and earn 6% you don’t pay any capital gains on your $600 gain.

With interest rates at an all time low there isn’t much point of shielding a few dollars of interest income. But there’s still a great opportunity in the market to make some real long term gains and shield those gains from tax.

This strategy works best if you’re young, but you’re never too old.   If you have TFSA room think of it as an alternate retirement vehicle. When you’re 60 or 65 and ready for retirement any income you withdraw from your RRSP will be taxed as income but the TFSA will be a tax free withdraw.

 Photo by Jaime Lopes on Unsplash