The Federal Government has announced that the annual contribution amount for Tax-Free Savings Accounts is being increased to $6,000 a year. Think a Tax-Free Savings Account is just a savings account? Think again! Finally an investment account you can fund with mutual funds, stocks, and bonds for profits that will never be taxed! Due to its unfortunate name, which contains the term ‘savings account’, many Canadians have been misled to believe that TFSAs are simply a bank account that is non-taxable. Think Tax-Free INVESTMENT Account - not bank account! TFSAs are much more useful and beneficial as part of an investment plan than as a bank account. In fact, the benefits of having a TFSA that is not invested are almost non-existent. After factoring in the erosion of purchasing power due to inflation (2.7% average over last 100 years)1 your returns are actually negative!
The banks have been most successful in marketing TFSAs. Rather than making full use of their potential as part of an investment strategy, they offer high-interest rates on small deposits that are generally unavailable with regular savings or chequing accounts. These high-interest TFSAs currently offer a whopping 1.15% annual interest rate!2
If you maxed out your TFSA at the bank on the first day of the year every year since they were introduced (2009-2018) you would have saved $57,500 of your own money and at 1.15% interest it would have grown your savings to about $61,108. If that growth was taxable it could have been taxed at the highest rate (53.53% in Ontario for 2018). Using these simple numbers, you would find that you could have saved a maximum of about $1,931 in taxes over the ten years. This works out to about two extra coffees a week. In contrast, if the TFSA had been invested rather than just sitting at the bank, it could have achieved a reasonable return of 5% or more annually. In the graph above you can see a comparison of the two scenarios. In contrast, the TFSA Investment would have saved enough in taxes to afford an extra 10 coffees a week.
Paying less tax is a great thing but if you are saving for something substantial like your retirement or a home it will take a much longer time to get there with a TFSA that is not invested. The chart on the right illustrates this point by demonstrating the potential of a TFSA Investment in comparison to a High-Interest TFSA.
TFSAs are for everyone but High-Interest TFSAs don't have much benefit for anyone (except the banks). The sooner you invest your TFSA, the more time it will have to grow. Take advantage of the power of tax-free growth by investing your TFSA. To learn more about how TFSAs work or to discuss how a TFSA can help you reach your savings goals, call your Keybase Financial Advisor today.
Keybase Financial Group Inc. is a member of the Mutual Fund Dealers Association of Canada and the MFDA Investor Protection Corporation (the “IPC”). Keybase is registered with all provincial securities commissions for the exclusive sale of mutual funds and exempt market products, such as: Principal Protected Notes, Alternative Strategies Funds and Hedge Funds.
Any data provided is for illustration purposes only. The opinions, estimates and projections provided by a third party are those of the author as of the date indicated and are subject to change without notice. Keybase Financial Group takes no responsibility for any errors or omissions which may be contained