It's Your Money  

Using Tax Free Saving Accounts for long-term saving

A better use for TFSAs

As contribution room continues to grow, the Tax Free Savings Account (TFSA), once considered a quaint savings vehicle, is now becoming a powerful retirement tool.

When the TFSA was introduced in 2009, it was mostly used as a place to stash a bit of short-term money. Back then, you could only contribute $5,000 per year, but additional room has been generated every year since.

If you’ve never contributed to a TFSA, were 18 or older in 2009 and have been a resident of Canada since then, you would have contribution room of $81,500 in 2022.

As contribution room grows, the TFSA is becoming an even more important savings vehicle. Why? Because any money in a TFSA is allowed to grow tax-free. That includes interest, dividends and capital gains.

Now that contribution room is more substantial, I want to answer questions about how people should be using their TFSAs.

Is the TFSA becoming more of a long-term savings tool?

It is. If you received a 5% annual return on a $5,000 investment and held it in your TFSA for 20 years, it would be worth $13,226 and you wouldn’t have to pay taxes on the $8,226 of growth. An investment of $81,500, however, with the same return, would be worth $216,244 in 20 years. That growth of $134,744 would also be completely tax-free.

So, people are starting to see significant growth, and that encourages them to look at the TFSA as more of a long-term savings vehicle.

What’s one mistake people make when it comes to their TFSA?

The most common one we see is around withdrawals. When you remove money from the account, you can’t add it back until the following year. For instance, if you take out $5,000 in 2022, you can only re-contribute that amount in 2023. But some people treat TFSAs like a bank account and move money in and out repeatedly which causes them to over-contribute (and incur penalties).

Should an RRSP still be the first place to invest for high-net-worth individuals?

Many of them should still be using RRSPs because RRSP room is generally higher than with a TFSA. Some high-income earners generate $29,210 a year in RRSP room (the maximum RRSP contribution allowed for 2022), so there’s a big tax saving there.

In general, if your marginal tax rate is higher today than it will be in retirement, then you should use an RRSP. Younger people with lower incomes might be better off contributing to their TFSA, and then later, when their income increases, use that TFSA money to fund their RRSP.

What is a good way for a high-net-worth individual to use their TFSA today?

Now that there’s more contribution room, if you were to maximize your RRSP, this would generate a fairly significant tax saving. Rather than spending the refund, you should invest it inside a TFSA and start accruing even more tax-free money.

For people over 71 who don’t need the income from their Registered Retirement Income Fund (RRIF), but are forced to withdraw the minimum payment each year, think about putting your after-tax RRIF proceeds into a TFSA. You’ve now converted taxable investment income into non-taxable income.

Can you have investments inside your TFSA that are similar to those in your RRSP?

You can, but right now a lot of people still think of it as a short-term savings vehicle. That will change as people get older and have more money in their TFSA. People should be giving the same amount of consideration to the investments in their TFSA as they do to their RRSP.

Eventually we’ll have a situation where people will have hundreds of thousands of dollars in their TFSA, depending on how well they’ve done.

We’re not there yet, but you shouldn’t treat the TFSA as a lesser account.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

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About the Author

Brett has worked in the financial advice industry for over 15 years and is designated as a chartered investment manager(CIM) and certified financial planner (CFP).

In 2014, Brett was appointed to the board of directors of FP Canada (the national professional body for financial planning) and spent seven years on the board, including his final two as board chair. More recently, he was appointed to the Financial Planning Standards Board (FPSB), which is the international professional body for this industry with a three-year term beginning in April 2023.

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy-to-understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the national and global boards focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns or if you’d like a referral to a qualified CFP professional in your area by emailing him at [email protected].


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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