Pumped Up Portfolio

As contribution room grows, this once quaint savings vehicle is now becoming a powerful retirement tool.

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When the TFSA was first 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, but additional room has been generated every year since. (Last year, the annual investable amount increased to $5,500 in order to adjust for inflation.)

As more room becomes available, the TFSA is an even more important savings vehicle.

As more room becomes available, the TFSA is an even more important savings vehicle, says David Ablett, Director of Tax and Retirement Planning with Investors Group. Why? Because any money in the account is allowed to grow tax-free. That includes dividends, capital gains, bond income and more: Whatever’s in the TFSA won’t be touched by the government.

Now that the contribution room is more substantial, we wanted to know how people should be using their TFSA today.

David Ablett
B.Comm (Hons), is Director of Tax and Estate Planning with Investors Group

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

    It is. If you received, say, a five percent return on your $5,000 investment in 2009, you’d have earned $250. Now, if you have $31,000 invested, you’ll make $1,550. So people are starting to see some 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?

    It’s around withdrawals. When you remove money from the account, you can’t add it back until the next year. For instance, if you take out $5,000 in 2013, you can only re-contribute that amount in January 2014. Make your withdrawals as late as you can in the year and you’ll get that room back very quickly.

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

    A lot of them should still be using the RRSP, because RRSP room is still higher than with the TFSA. Some high income earners generate nearly $24,000 a year in RRSP room. So there’s a big tax savings there. The rule of thumb is that if your marginal tax rate will be higher today than it will be in retirement, then you should use an RRSP. If someone is younger and their income isn’t that high, they might be better off to start contributing to their TFSA and then later, when their income rises, they can 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 room to use, if someone is going to maximize their RRSP, which would generate a fairly significant tax savings, don’t go out and spend the refund. Invest it inside a TFSA and start accruing even more money tax-free. For people over 71 who don’t want to use the income from their Registered Retirement Income Fund but must receive the minimum payment, think about putting the after-tax RRIF proceeds into a TFSA. You’ve now converted taxable investment income into non-taxable income.

  • Can you use investments inside your TFSA that are similar to the ones 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 TFSA as they do 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 can’t treat the TFSA as a lesser account.

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