November is Financial Literacy Month and so now is a great time to discuss the TFSA or as I wish they\u2019d named it the TFIA (Tax-Free Investment Account).<\/p>\n
These accounts have been around for over a decade, but the level of misuse is quite high. That\u2019s not your fault. The vast majority of us didn\u2019t 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 \u2018today\u2019 is something I always added in my head to that promise.<\/p>\n
You may have been lured into the bank\u2019s promise of a whopping 1.75% interest rate on your TFSA and have even started a regular contribution plan to it. We\u2019ve 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\u2019ll have a lovely pool of money to spend.<\/p>\n
And that\u2019s a great way to start saving. But it\u2019s not the whole truth.<\/p>\n
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The TFSA is at its best when you use it not as an average savings account to see how interest works, but as an investment tool. The wonderful \u2018tax free\u2019 component works by shielding whatever is inside it from tax.<\/p>\n
E.g.<\/p>\n
You earn 1.75% on $10,000 for a year \u2013 you don\u2019t pay any tax on that $175 income.<\/p>\n
Or<\/p>\n
You invest in a stock or ETF and earn 6% \u2013 you don\u2019t pay any capital gains on your $600 gain.<\/p>\n
With interest rates at an all-time low, there isn\u2019t much point of shielding a few dollars of interest income. But there\u2019s still a great opportunity in the market to make some real long-term gains and shield those gains from tax.<\/p>\n
This strategy works best if you\u2019re young, but you\u2019re never too old. If you have TFSA room, think of it as an alternate retirement vehicle. When you\u2019re 60 or 65 and ready for retirement, any income you withdraw from your RRSP will be taxed as income, but the\u00a0TFSA will be a tax-free withdrawal.<\/strong><\/p>\n
\nPhoto by Jaime Lopes on Unsplash<\/span>
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