As of December 2013, just less than half of Canadians (48%) have opened a Tax Free Savings Account (“TFSA”). This sounds like great take-up given the infancy of the TFSA (created in 2009), but in my experience I have found that there is a common misconception about the TFSA.
In too many instances, I have come across clients maximizing their TFSA contribution room with cash while still holding long-term investments in open/non-registered accounts. When asked why they have it set up this way, in most cases the answer is the same, “I thought I could only hold cash in my TFSA.”
The advantage of having money invested in a TFSA is to benefit from the tax free growth. You do not get this benefit in an open account. For example:
Assumptions:
5% rate of return
20 years investing
$5,000/annual investment (start of year)
31% Marginal Tax Rate
Open account balance = $145,500
TFSA account balance = $173,600
Difference of $28,100
In order to harness the true power of the tax free growth, it makes sense to hold higher earning investments in the TFSA. Consider the following comparison:
1% interest rate
$30,000 balance
31% Marginal Tax Rate
Tax savings in a year = $93
5% return rate $30,000 balance
31% Marginal Tax Rate
Tax savings in a year = $465
You are saving more than 5 times the amount of income tax by simply holding your higher yielding return investments in your TFSA.
For more information on how to get more out of your TFSA, speak with one of your TMFG advisors.
Picture Source: CI Investments Inc.