Invest in Your TFSA
Jarrett McKay - Jun 13, 2016
The Tax-Free Savings Account (TFSA) has been in existence since 2009. In 2015, the total available contribution room was $41,000 for those eligible Canadians who had not yet contributed. The annual TFSA dollar limit from 2009 to 2012 was $5,000. In 2
The Tax-Free Savings Account (TFSA) has been in existence since 2009. In 2015, the total available contribution room was $41,000 for those eligible Canadians who had not yet contributed. The annual TFSA dollar limit from 2009 to 2012 was $5,000. In 2013 and 2014, the limit increased to $5,500 and the limit for 2015 increased to $10,000.
One of the most compelling reasons for investing in a TFSA is the opportunity for tax-free growth. The main difference between the TFSA and Registered Retirement Savings Plan (RRSP) is that TFSA contributions are funded with after-tax dollars, so any investment income or capital gains earned within the plan are not taxed upon withdrawal.
One of the downsides of the TFSA is that capital losses cannot be offset, like they can be in non-registered accounts. However, if a well-balanced portfolio is created for the long term, this should not be a concern.
Which Investments are Best Held in the TFSA?
In order to take advantage of the TFSA’s tax benefit, one of the objectives of many investors may be to maximize tax-free returns in a consistent and reliable way.
For investors who have a longer time horizon, investments with a higher yield potential, such as equities or mutual funds, may be ideal investments for a TFSA because the potential future gains will not be taxed. Even though the Canadian tax system offers a tax break on capital gains and Canadian dividends, the opportunity to earn these gains on a tax-free basis should not be overlooked.
Foreign shares are often better invested outside of the TFSA. Within RRSPs or Registered Retirement Income Funds (RRIFs), dividends on U.S. shares are exempt from withholding taxes, which isn’t the case if the shares are held within a TFSA. Foreign shares from countries outside of the U.S. may also be better held outside of a TFSA because any foreign withholding tax (withheld at source) cannot be claimed as a foreign tax credit on a personal income tax return.
However, even more conservative investors can find suitable investments to hold within the TFSA depending on individual investment objectives.
Short Term or Long Term?
One beneficial feature of the TFSA is that withdrawals will be added back to the following year’s contribution room, whereas RRSP withdrawals cannot be re-contributed.
Given this benefit, the TFSA may be an effective investment vehicle for both the short and long term. Some investors may choose to use the TFSA as an emergency fund and invest in more liquid assets like shorter-term fixed income investments. Others may wish to invest in longer-term income generating investments. The key is deciding how best to use the TFSA for your particular situation and choosing the appropriate investments accordingly.
The Bottom Line?
The opportunity to accumulate future wealth through the use of a TFSA can be significant. An investor who invested the full contribution amount annually since the TFSA’s inception in 2009 of $41,000 (including the 2015 contribution) and then stopped will have accumulated well over $100,000 after 25 years, assuming a rate of return of 5 percent.
At the end of the day, taking advantage of the tax-free growth opportunity provided by the TFSA should be a priority. If you haven’t already done so, be sure to participate!
CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA
This newsletter is solely the work of the author for the private information of clients. Although the author is a registered Investment Advisor at Canaccord Genuity Corp., this is not an official publication of Canaccord Genuity Corp. and the author is not a Canaccord Genuity Corp. analyst. The views (including any recommendation) expressed in this newsletter are those of the author alone, and are not necessarily those of Canaccord Genuity Corp. The information contained in this newsletter is drawn from sources believed to be reliable, but the accuracy and completeness of the information is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. This information is given as of the date appearing on this newsletter, and neither the author nor Canaccord Genuity Corp. assume any obligation to update the information or advise on further developments relating to information provided herein. This newsletter is intended for distribution in those jurisdictions where both the author and Canaccord Genuity Corp. are registered to do business in securities. Any distribution or dissemination of this newsletter in any other jurisdiction is prohibited. The holdings of the author, Canaccord Genuity Corp., its affiliated companies and holdings of their respective directors, officers and employees and companies with which they are associated may, from time to time, include the securities mentioned in this newsletter.
The preceding information is for general information only and does not constitute tax advice. All investors should consult with a qualified tax accountant. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning Services. FOR DISTRIBUTION IN CANADA ONLY