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Finance 101

How to use a TFSA to get better investing results

January 14, 2021

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How to use a TFSA to get better investing results

Finance 101

Interested in putting money into your Tax-Free Savings Account (TFSA)? The new limit for 2021 will be $6,000.

What if you’ve never invested in a TFSA before? If you’ve been eligible for a TFSA since 2009 (at least 18 years old and a Canadian resident), then you’ll have a maximum $75,500 of contribution room as of Jan. 1, 2021.

Now, if you’ve ignored the TFSA up until now, you’re not alone. A lot of Canadians give it a pass because they think it’s just meant for savings. They think they can’t get a good return with it. They think it can only be used for high-interest savings or a GIC. Well, we’ve got something to say about that! 

Why investing with a TFSA (not just saving) can make good sense

They really ought to have called the TFSA the Tax Free Investing Account (and then it would be the TFIA — but you get the idea) when it was created twelve years ago on Jan. 1, 2009. 

Like their older sibling the Registered Retirement Savings Plan (RRSP), TFSAs are a particular type of investment account in which you can hold a wide variety of investments.

You can have a savings account, mutual fund, Exchange Traded Fund (ETF), stock, bond, or many other types of investments in a TFSA! If you want to go with a high-risk investment in your TFSA, you can do that. If you prefer to stick with a more traditional, safe and sound savings account, you can do that too. The point is, your options aren’t limited to just a savings account. You can hold the same investments as an RRSP, but unlike an RRSP, withdrawals are tax-free. Plus, investment income and growth in a TFSA are tax-free, too!

So why do some Canadians still think a TFSA is just for savings?

Big financial institutions want cash deposits, since they don’t have to pay you very much for them. They can then lend the money out at a higher rate than they pay you. The banks love to advertise their TFSA interest rate to get new business. I cringe a little whenever I hear someone ask, “What’s your TFSA rate?” because it’s a prime example of how effective TFSA savings account marketing is and how much confusion it has caused in the general public.

The big banks tend to bombard Canadians with TFSA promotions offering a bit more interest here or there for a few months at a time. These are almost always time-limited promotional rates. Often, they’re just paid on new deposits. And they might only be available for less than 6 months!

But once those promotional rates expire, you could be left with an embarrassingly low return on your savings. For many Canadians who have had that experience, it’s not surprising that they don’t think of a TFSA as more than a savings vehicle. 

Time to top up your TFSA investing account?

At this time of year, many investors think about contributing to their RRSPs — and that’s a great idea, to build up that nest egg. But if you’re saving for something other than retirement, then the TFSA might be the better option. Compare RRSP vs. TFSA: Which is right for me?

If you need help deciding how much to contribute to your TFSA this year, you can use our handy financial calculator for RRSP and TFSA contributions. And if you still need help, chat with your CI Direct Investing financial adviser.

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