The new Tax Free Savings Accounts are proving to be popular, but many Canadians are choosing only interest bearing TFSA plans that pay so little that the accompanying tax savings are negligible. This is generally what your financial institution will suggest, because it is simple and easy for them to set up and there is no advice required. The teller takes your money and signs you up and the teller gets a sale( one of the performance measurements for the job). Everybody is a winner except the investor.
Taking a current rate of 1.2% offered by a credit union on a high interest savings account, $5000 earns $60.00 in yearly interest, and if you are paying a 30% rate of income tax you save $20.00 in Tax, not exactly a windfall. A study by one of the major banks found that 90% of TFSA’S are in term deposits or high interest savings accounts. The same mistake is often made today with RRSP’S.
Self directed TFSA’S and RRSP’S can invest in stocks, bonds, mutual funds, segregated funds, and ETF’S as well as interest bearing securities. The point of the TFSA is to save on the income tax you earn on your investments, and the better the return you earn on your investment the more tax free money you keep in your pocket. Therefore there is a good case for investing your TFSA in more aggressive investments to earn a higher return.
I would suggest that investing in Segregated funds is a smart choice for TFSA ’S. Segregated funds offer the opportunity for a higher return and have other advantages such as passing to a beneficiary without probate, and guarantees on return of Capital varying from 75% to 100% depending on the product.
Some advisors suggest TFSA’S for keeping emergency funds available, but to get any return on the funds and save any amount of tax you need to lock the funds in for a longer period. The best current option for an emergency fund is a high interest savings account. The funds are immediately available, which is the idea, and the amount of tax you save by putting them in a TFSA is negligible.
You can save more by buying a few less latte’s.
To Find out more about investing your TFSA in a segreagated fund Contact us.