Discover the Hidden Power of a Tax-Free Savings Account
If you have a Tax-Free Savings Account (TFSA), you might just be saving money in it, but there’s a more powerful way to get it working hard for you. Here’s how to exploit its full potential.
Do you have a good understanding of the uses for this account? If you’re unsure, you’re not alone. Many Canadians don’t see any difference between a TFSA and a Registered Retirement Savings Plan (RRSP).
Each can be used for shrewd tax and investment planning, but in different ways. Let’s start with the tax breaks.
Funds invested in your RRSP are deducted from your taxable income, to reduce the tax you owe today. An RRSP also allows you to defer the tax on your money until you are retired. At that point, you will likely be in a lower tax bracket; but you will owe tax on any withdrawals you take from your RRSP, both from the original capital and the growth (two exceptions are the Home Buyers’ Plan and the Lifelong Learning Plan).
With a TFSA, there are no up-front tax credits, because this is a fully tax- sheltered account. Which means you will never owe tax –– not on the principal investment nor the growth on your investments. You can also withdraw your money at any time, without restrictions.
The tax-sheltered feature of a TFSA can be exploited fully by using it for investments. This is the true, but essentially unknown, power of a TFSA.
It can actually hold a wide range, such as GICs, mutual funds or exchange- traded funds. If you are only keeping cash in your account, you miss out on the incredible benefits of compounding –– reinvesting the growth within your account as part of a long-term investment strategy. Your assets will accrue in value and remain fully tax-sheltered.
This is the real value of a TFSA. Leverage this feature and turn your TFSA into a powerful investing tool. Ask your Financial Advisor about TFSAs and how to develop a mix of investments to get this account performing strongly for you.