When Tax-Free Savings Accounts (TFSAs) first appeared in January 2009, millions of Canadians embraced them with open arms—and open wallets. Even if we’re not a nation of diligent savers, we love lowering our taxes, and TFSAs allow you to save and invest money without paying any tax on your growth. That means all your interest, dividends and capital gains are sheltered for your lifetime, even when you withdraw the funds.
Many Canadians have been making the maximum annual $5,000 contributions for each of the last three years, but often their TFSA investment choices are not ideal. Part of the problem is the name: “Tax-Free Investment Account” would have been more appropriate, because you can do much more than save—you can invest in stocks, bonds, mutual funds and exchange-traded funds (ETFs) in your TFSA. While keeping your contributions in a plain vanilla savings account is fine for the short-term, it isn’t the best strategy for long-term wealth building. It also won’t save you much on tax: $5,000 in a savings account earning 1.5% will pay you $75 in interest annually. Even if you’re in the highest tax bracket, you’d save a mere $35 in tax by sheltering this in a TFSA.
Making the most of your TFSA is more important, because we’re not just talking about a few thousand dollars any more. As of this January, you could be holding as much as $20,000 in your TFSA—or more (we’ll tell you how to accomplish that shortly). It’s time to consider moving beyond the humble savings account. You may want to open a TFSA with a discount brokerage, where you can get access to a whole range of investments with more potential for growth.
That said, there are some people who shouldn’t bother with TFSAs at all. If you have outstanding debt—a high-interest mortgage, credit card debt, or student loans—then a TFSA should probably wait.
If a TFSA does make sense for you, however, you need a good strategy to power it. We invited six investors to share their secrets and then asked two financial experts—Jason Heath, a Certified Financial Planner with E.E.S Financial Services in Markham, Ont., and Marc Lamontagne, a fee-only adviser with Ryan Lamontagne in Ottawa—to analyze each plan. We hope their ideas will help you find a strategy that makes your TFSA money work harder.