Financial Advice: Should I Invest in a TFSA?

Yes! The short and long answer is Yes! A million times Yes! This is the best account created by the CRA and something beneficial for every Canadian. The only question up for debate is if there are other accounts you should prioritize over a TFSA. Regardless a TFSA is always on the list of places to put your money. 

‍What is a TFSA?

A TFSA or Tax-Free Savings Account is an investment structure created by the Canadian Government to help Canadians save for the future. The goal of this account was to help smaller investors invest their funds without getting taxed on these amounts. While designed for smaller investors the account has grown to make a substantial difference for even larger investors and will continue to grow to make a larger and larger impact.

Investors can contribute to this structure and invest however they would like, Stocks, Bonds, Mutual Funds, ETFs, GICs, Cash, etc. are all available inside a TFSA. You may have multiple TFSA accounts with any different mix of investments and while it’s inside you will not be taxed on any of the income or gains made on those investments. When you withdraw those funds, you also will not be taxed. Creating a completely tax-free environment to grow investments. 

‍Advantages of a TFSA

Tax-Free Growth and Income - This is the main purpose of this account, to grow investments without having to pay taxes along the way. This does present the best environment to grow money without the tax headwinds.

Tax-Free Withdrawals - To further the benefits, you do not have to pay taxes when you pull the funds out. If you invest for the long term and grow this account to a very large balance you could be making a substantial annual income from it. Not paying taxes on that could create tax-free income in retirement.

‍Disadvantages of a TFSA

Contributions are not tax-deductible - Unlike an RRSP, contributions are not deductible from your income. This may make an RRSP a better investment for someone depending on their situation. 

Limits - There is only a limited amount you can contribute to a TFSA and if you exceed these limits the penalties can add up quickly. But this limited amount is better than nothing! 

‍Contributions

Contributions to a TFSA are reported and tracked by the CRA to ensure you do not overcontribute the allotted amounts. The total amount you can contribute starts when you first turn 18 years old and will continue to build even if you do not use it. Each year the new contribution amount is assessed to keep up with inflation. Here are the contribution limits in the prior years.

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Withdrawals

When you remove money from a TFSA account it is also reported to the CRA. Amounts that are withdrawn will be added back to your cumulative total the following calendar year. If you do not wait for the following year and do not have the room you will be charged a penalty.

Penalties for Overcontribution

The penalty for an over-contribution is 1% of the excess amount for every month in excess. If you over-contribute by $10,000 and have it in there for a year the penalty is $10,000 x 1% x 12 months or $1,200. These are not small penalties and add up quickly, therefore it is best to keep track of contributions and withdrawals.

Comparison vs. Other Registered Accounts

The other registered accounts offer great benefits for specific situations that would put them at a higher priority than a TFSA account. Here are a few examples:

Scenario 1: Goal to Save for Children’s Education

If this is your goal with the funds a RESP has more benefits than a TFSA.

Scenario 2: First-Time Home Buyer

If this goal is at the top of your list, the priority should be a FHSA or RRSP account. Those will provide greater benefits to hit this goal than a TFSA.

Scenario 3: Saving for Retirement

If this is you, offsetting the high tax rates of 40 or 50%+ is a better option than investing in a TFSA. But this could be different depending on each person.

Should You Invest in a TFSA?

Yes, you should. If you have money to invest you cannot go wrong utilizing your TFSA first. While there may be some registered accounts better for your situation, a TFSA would usually be the second-best place after that. In addition, a TFSA offers tax-free withdrawals therefore you could invest in a TFSA and then contribute to a different registered account once you decide on a better place to put it. Having said that there are a lot of factors such as managing contributions and withdrawals, and other financial situations specific to you. It is always recommended to speak with a Financial Advisor or Tax Professional to see what best fits your situation.

Sincerely,

Justin, Konrad, and Merriel

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Content Sources: Bloomberg, Trading Economics, Yahoo Finance, BCA Research

Disclaimer: This newsletter is solely the work of Konrad Kopacz and Justin Lim for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone, and they have not been approved by, and are not necessarily those of, Echelon.

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