The TFSA for long-term goals
The Tax-free Savings Account (TFSA) is a natural home for short-term savings, holding investments that pay interest and would otherwise be fully taxed. However, you can also use your TFSA for long-term goals, and therefore employ the growth potential of equities.
Convenient and flexible for the short-term
Designed to be practical and easy to use, the TFSA allows you convenient access to your money. Eligible funds can be withdrawn at any time, for any reason and any amount. This flexibility makes the TFSA ideal for helping you reach your savings goals faster, whether you’re saving for a new car, a well-deserved vacation or just for a rainy day.
If these kinds of short- or mid-term goals are what you're planning for your TFSA savings, then holding interest-bearing investments makes sense.
If the focus is retirement
If you see your TFSA as a long-term accumulation vehicle to supplement your RRSPs, it could be advantageous to weight investments towards equities*.
If equities outperform fixed-income investments over time, as they have historically, the potential growth of an equity-based TFSA will produce a larger pool that can be accessed tax-free. This would reduce reliance on fully taxed RRSP withdrawals, to generate the same retirement income but pay less tax. Of course, you can't claim a capital-loss tax break if you sell an equity in your TFSA for less than it costs.
Fit within your bracket
One factor to consider is your tax bracket – now and when you retire. If you expect your tax rate in retirement to be lower than it is today, you may want to rely heavier on your RRSP for retirement savings and use your TFSA for short- to mid-term goals. While it’s true that TFSA withdrawals are tax-free, the extra growth you get from RRSP tax deductions makes the difference. This added growth may more than offset the tax you’ll pay when your RRSP funds are eventually withdrawn. Since income generally falls in retirement, the RRSP will, as a general rule of thumb, make the most sense.
This strategy, however, assumes you still have a fairly long way to go until retirement. If your time frame is shorter, you’ll get less of a benefit from the added growth of the RRSP tax deductions, and the TFSA may be the more appropriate choice.
As a secondary savings tool
You may also wish to consider the TFSA if you have maxed out on your RRSP contribution or if you are over 71 and no longer eligible to make contributions to RRSPs.
Whether you decide to use your TFSA for a long-term goal or short-term goal, remember professional advice can help you find suitable investments for all your goals.
To determine how best to maximize the investment benefits of a TFSA, contact your BlueShore Financial financial advisor today.