A Thought On TFSAs and Your Retirement Plan

It’s time to stop playing it safe when it comes to the tax-free savings account and start thinking longer term. When the TFSA was introduced in 2008, the maximum an investor could contribute was $5,000. It was heavily marketed as a way to stash some cash into a “savings account” that the taxman could never touch. It increased the appeal of saving up for a rainy day, or for a major purchase a few years down the road. If you’re still unsure what the TFSA is all about, here is an investor guide to the TFSA. Moving forward to 2014… The TFSA maximum contribution has now grown to $31,000. And it’ll keep growing by at least another $5,500 every year. (Keep in mind a person can only make a one-time contribution of $31,000 if they’ve never made a contribution, or if that person had withdrawn that amount in a previous year. For someone who has steadily been socking away the maximum for the last five years, they would only be eligible to contribute the $5,500 limit for 2014.) That’s quickly adding up! To put this into perspective, a 25-year-old who started making annual contributions of $5,500 into a TFSA, and continued to do so every year until he or she retires at age 65, would have socked away $165,000 that could grow and later be withdrawn without any tax implications. If we assume a five per cent annual rate of return from the investments held in the TFSA, that would add up to $383,684 by retirement, thanks to the power of compounding – and not a penny of that would ever go to government coffers. For some fun… try plugging in your own time horizon and return estimates here - Fidelity Growth Calculator Achieving a 5 per cent return shouldn’t be hard. History strongly suggests, for instance, an investment in equities could well exceed that. The problem is that many Canadians aren’t taking full advantage of TFSAs, because they are choosing to put those funds into ultra-safe investments, like guaranteed investment savings and high-interest savings accounts offering low risk, but also low returns – one, maybe two per cent if you’re lucky. What has puzzled us the most about the TFSA is that the key purpose of them is for the investor to not pay any income tax, however, if you only earn 2% on your $5000 will only generate a return of $100.00. Is this really having a great impact on your income taxes? For people who simply want to save for near- or medium-term needs, a low risk option like a high interest savings account is a good thing, but having this inside your TFSA may not provide you with much in the way of income tax savings. But those who are not planning to withdraw their TFSA funds for years to come should look at creating a well-managed, diversified portfolio that matches your tolerance for risk, and will be much more likely to bolster the size of your savings in the long run. Of course, I am not suggesting to sock all your money away into a TFSA. RRPSs still play an important role for most retirement plans. The TFSA can pack a powerful punch when it comes to wealth building. But it’s up to us to realize its potential. The time to do so has arrived.

If you would like to discuss how a TFSA can fit into your retirement plan please let us know.


Andrew & Peter

#investing #tfsa #retirementplanning

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