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Don’t Waste Your TFSA on a Savings Account

By Robert Mulrooney

The Tax-Free Savings Account (TFSA) was introduced in 2009. Since then, the most popular choice of investment for a TFSA has been, well, a savings account. Though this may seem logical, it’s actually a shame because TFSAs can be used much more effectively than as simply a place to park cash.

The TFSA is a flexible, registered general-purpose savings vehicle that allows Canadians to earn tax-free investment income. Adults can contribute up to $5,000 per year, and tax-free withdrawals can be made any time. Another plus is that neither income earned in a TFSA nor funds withdrawn affect eligibility for federal benefits like Old Age Security or the Canada Child Tax Benefit.

Generally, I feel the banks have done a poor job of educating investors about what should be in their clients’ TFSAs.

A recent survey revealed that the majority of assets held in TFSAs are sitting in basic savings accounts at the bank. These accounts generally pay very low interest and make poor long-term investments. If you are using a TFSA as an emergency fund and liquidity is extremely important, however, then a savings account makes sense. Setting aside three to six month’s living expenses in cash in case of job loss or extended illness is good financial planning. Otherwise, there are better uses for your TFSA.

Here are just a few that I’ve used with my clients:
Income Funds – Many mutual funds can generate much higher yields than the meagre interest paid on a savings account. These funds are ideal for retirees and income-seeking investors.
Stocks – Buying two or three high quality stocks that pay dividends and have the potential for capital gains is a strategy that works well as part of an overall plan involving other assets like RRSPs.

Helping a future generation – TFSAs are a great way to help kids or grandkids save for a home; you can invest $5,000/year in each adult child’s TFSA. Keep in mind, though, that it’s their money. Make sure everyone’s on the same page.

Income Splitting – There are no attribution rules for TFSAs, so the higher income-earner of the household can gift money to the lower earner to make TFSA contributions. The lower income-earner can withdraw funds from the TFSA without any tax implications to the higher earner.
For more details on how these strategies can work for you, just give me a call.


Please consult a professional investment advisor and your accountant before acting on any information presented in this column.

This article was originally published in the November 2012 edition of the Comox Valley Business Gazette.