TFSA: Concentrate on the TF, not the SA

A wonderful new opportunity…that many people waste

Field of Coins

Tax Free Savings Accounts (TFSA) were introduced in the 2008 budget, and went into effect in 2009, so they have been around for a few years now. According to a CIBC poll, almost half of Canadians have opened a TFSA,  but there is still a lot of confusion about just what a TFSA is, and how to use it.

The problem may start as early as the third and fourth words of the name of this savings and investment vehicle.  People are of course attracted to anything that has the words “Tax Free” in it, but in this case they seem to focus on the “Savings Account” part of the name.  According to ING, almost half of Canadians have their money invested (using the term rather loosely) in a savings account.  While I’m not going to disparage anyone for saving money, I will point out that that is generally not the best way to use a TFSA; putting money into a savings account within a TFSA is squandering an opportunity to make the most of this vehicle.

Not sure what to invest in within your TFSA?  First, you should know that there are a few limits on where you can invest your money within a TFSA.  Generally speaking, everything that qualifies for inclusion in an RRSP also qualifies for inclusion in a TFSA.  Real estate, and more than 10% of a corporation, partnership, or trust, and a few other specific “advanced” investments are not allowed.  As far as most of us are concerned, the limits come down to: if you own a company, you can’t put it into your TFSA to shelter yourself from the tax hit from your business income, or when you sell.  Neither can you put your house or second property in a TFSA  You are, however, allowed to invest in real estate based funds and corporations.

Assuming you are looking for reasonable long-term growth, and that you are fairly certain you will  not need the money on short notice, what you should most definitely NOT do is allow your financial institution lull you into putting your money into  any type of savings account.  With today’s low interest rates, the last thing you want to be doing is letting your money languish in an account that pays only a few measly percentage points.  A good starting place would be looking at the investments in your RRSP. If you’ve already got a large percentage of your investments in those particular stocks or mutual funds, you may want to choose others to invest in, but the point is that you can look at those investments as the types of investments to make within your TFSA.

If you currently have TFSA money in a savings account, don’t feel bad.  Financial institutions have made an art of subtly leading people towards this option.  Deposits in savings accounts give them very low-cost capital that they can invest for themselves.  But just because you went that route in the past doesn’t mean you need to stay on that path.  Make an appointment with your advisor and tell him or her that you want to get more out of your money, and ask him or her to help you find a solution that meets your situation.


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