Should you have a TFSA?

Tannya McBride once called the tax-free savings account one of the best things Stephen Harper's government ever did. What did she mean? Here, the JR Shaw School of Business finance instructor (and grad of the class of '07) brings clarity to the claim by explaining the registered saving tool and offers tips on making the most of the TFSA.

It’s not an RRSP. “People tend to confuse them but they’re complete opposites,” says McBride. TFSAs contain your after-tax money. Because of the tax refund you get on what you invest in them, RRSPs hold money you’ve yet to pay taxes on; that comes when you withdraw it at retirement. That doesn’t happen with a TFSA.

It’s a tax shelter. “Banks heavily market TFSAs as savings accounts, so a lot of people don’t know it can be any kind of account.” More importantly, it can be almost anything that generates income: mutual funds, GICs, shares and so on. A TFSA, for example, is good for things like foreign stocks, adds McBride, the dividends of which are taxed more than domestic investments.

It’s for the short term. McBride sees the TSFA as a disciplined form of saving for big-ticket items like down payments, travel or an emergency fund. Unlike an RRSP, withdrawals are not penalized. Also unlike an RRSP, you don’t lose contribution room (TFSA investment limit is currently $5,500 and the unused portion accrues each year) upon withdrawing. Whatever you take out, you can put back.

It works in the long term, too. If your tax bracket is high when you retire, your RRSP will be taxed accordingly: “All those refunds you got, you’ll end up paying back to government.” By planning ahead (McBride recommends consulting your certified financial planner at least once a year), shifting your focus to TFSAs early can in some cases ensure those “golden” years live up to the name.

So what do I do now? Again, this is a matter for you to take up with your planner. That said, if you’re currently in a tax bracket too low to offer a decent RRSP refund on your income tax, consider stashing your cash in a TFSA. Once you’ve climbed the ladder to a higher bracket, reap the rewards of transferring to an RRSP. “Then you have a big contribution and a nice tax refund,” says McBride.

In the end, always take a balanced approach. If retirement is years away and you’re currently in a mid to high tax bracket, invest in RRSPs for the tax refund they provide. Then you can put that toward your mortgage, says McBride – or, even better, start saving for a vacation in that TFSA the bank sold you on.

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