It makes sense to want to maximize returns in your Tax-Free Savings Account, and here is why:
In Canada’s other tax-advantaged savings plan (the RRSP) you get a tax deduction when you contribute, but you pay full tax on a withdrawal. So ultimately anything you make on your investments will be taxed when you take money out of your plan.
The TFSA is the opposite. You do not get a tax deduction on the contribution, but you do not pay tax when you withdraw. In other words: it is what you make on the investments that is sheltered from tax, meaning the more you make the more you shelter.
That being the case, why would you want to have your TFSA money in a bank account earning next to nothing?
A better option would be to consider a self-directed Tax-Free Savings Account, within which the following types of investments are eligible:
• Income trusts and dividend-paying stocks
• Domestic and global government bonds
• Domestic and global corporate and high-yield bonds
• Mutual funds
• ETFs
• Common stocks and preferred shares
• REITs
• Some new issues
• Some hedge funds
• And more
The list is extensive. In fact anything that is eligible for a self-directed RRSP is also eligible for a tax-free savings account.
Here is a tip for investors who have TFSAs as well as other investment plans. Consider strategically allocating asset classes according to the type of plan.
For example: dividend paying stocks, while very good investments, can adversely affect your eligibility for certain government programs. In some cases it might be advantageous to hold these in your TFSA where the dividend income is sheltered. Consider things like annuities with prescribed taxation for non-registered plans, and GICs or bonds within your RRIF or RRSP.
The Tax-Free Savings Account can also be used effectively when estate planning, with the ability to bypass probate, and name revocable or irrevocable beneficiaries.
I will present more on this next week.
On February 23 at the Qualicum Beach Civic Centre we will be hosting a presentation entitled The Tax-Free Savings Account – it’s More than a Bank Account where we will be presenting these and other strategies.
Please call (250) 594-1100 or e-mail paige.renouf@raymondjames.ca or register online at www.jimgrant.ca.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only. Securities are offered through Raymond James Ltd., member CIPF. Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member CIPF. For more information feel free to call Jim at 250-594-1100, or e-mail at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.
