Thursday, February 5, 2015
How to Have a Healthy Portfolio
Canadians overlooking TFSA potential
By Jason Brown, Envision CU
any Canadians, particularly those in their ‘savings years,’ are missing a major opportunity to build serious wealth through a Tax Free Savings Account (TFSA). Only five out of ten British Columbians hold a TFSA, according to recent research from Central 1 Credit Union.
“It’s an underused tool and I think that’s because people don’t know enough about what it can do for them,” says Tanya Wilson, an investment advisor at Envision Financial. “Many Canadians just use it for an emergency savings account, but it also makes sense to use it as a long-term savings vehicle.”
A common misconception is that only cash can be parked in the TFSA, but that’s not so. There are a variety of investments that can be held in a TFSA, including mutual funds, index-linked term deposits and even bonds and stocks.
“The TFSA is like a cup—you can add water, juice, milk or coffee into it. Since there is so much flexibility regarding the type of investment you can hold, it provides a tremendous opportunity to create wealth for retirement. TFSAs are also an excellent complement to RRSPs because you can access these investments tax free in retirement,” says Wilson.
While taking advantage of both RRSPs and TFSAs is important for a healthy financial portfolio, how much one invests in a TFSA versus your RRSP comes down to a number of factors, including what your projected retirement income will be.
“If your marginal tax bracket is higher now than it will be in retirement, then it may be more beneficial to concentrate the bulk of your investing in RRSPs,” says Wilson. “If it’s going to be the same or less now than it will be in retirement, TFSAs may be the better investment vehicle. Particularly, if you’re currently in a very low marginal tax bracket, you won’t be receiving much tax savings from contributing to your RRSPs and will likely be better off building up your TFSA account.”
In addition to access to tax-free income that can be withdrawn at any time and its ability to hold a variety of different investment types, the TFSA also boasts some other benefits. The TFSA has no age caps for seniors, unlike an RRSP, which has an age limit of 71, and contribution limits can be replenished when withdrawals are made from a TFSA.
But there are restrictions investors should be aware of when considering a TFSA, such as who can contribute to the account and penalties for contributions beyond your annual or lifetime cap.
The rule is that any money you take out of a TFSA in a year can’t be re-contributed until the following calendar year or you may be faced with a nasty penalty bill from Canada Revenue Agency if you go over your limit.
“While the benefits of a TFSA typically overshadow the drawbacks, a financial professional should be consulted to determine how this or any other registered product will fit with your current asset mix and life circumstances,” says Wilson.
Follow Envision Financial on Twitter: @EnvisionFin
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