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TFSA Strategies

Peter Katevatis - Feb 09, 2022
The Tax Free Savings Account (TFSA) is an excellent tool to lower your tax payable while increasing your net worth. We can help you select your strategy plan
TFSA - What's Your Strategy?

If you are born before 1991, your cumulative TFSA contribution room is over $80,000. If you continue to make a $500 monthly contribution and earn 8.0% the account will be worth $1,000,000 in 25 years!

 

The real benefit of the TFSA is that when you do make a withdrawal it is truly tax free, and you even get your contribution room back the following year.  The RRSP has some excellent short-term tax benefits but withdrawals are very painful. The opportunity cost of accessing your own funds from a TFSA is quite minimal, how refreshing!  Here are more TFSA DOs & DONTs

 

When it comes to the strategy for the TFSA, there are several conflicting ideas especially around risk.

 

Investing in HIGH RISK ventures inside the TFSA can shelter a big winner if it happens.  However, if your high risk doesn’t work out you are sheltering your loss.  Tax free losses are particularly painful.

 

Investing in LOW RISK bonds inside your TFSA will shelter high taxed (T5) interest income. However, if your return is only 2% your 25-year compounding growth similar to the example above will only leave $325,000. I don’t want to belittle that number but it is only one third of the potential million.

 

Consider WHY you are investing.  Is this for retirement?  Short term emergency fund? Vacation savings? Are you a senior looking for tax free growth now that you can’t contribute to your RRSP? The answers to these questions will help determine the correct strategy for your specific needs.

 

The strategy deployed should be an extension of your overall plan. You should not be investing using a method that makes you feel uncomfortable or anxious.  If you are waking up at night in cold sweats worried about your investments, that is a pretty clear sign that your risk composition is too high.

 

If you are trading actively and holding positions for less than 5 years it might be better for you to be active inside a TFSA.  Buying a company in a cash or margin account and holding it for 15-20 years will create its own compounding tax free growth as you only pay capital gains tax on disposition.  Remember, any contribution to your TFSA is a deemed disposition and may create a taxable event if you contribute a profitable position.

 

The team at Katevatis Wealth Management is here to help you navigate the complex world of investing. Reach out with any questions you may have.