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Canadian Tax-Free Savings Account (TFSA) Right for Retirement Investment?

Canadians are now capable of using a tax-free savings account thanks to their Conservative government. The investment device permits up to $5,000 deposit annually without paying taxes on the interest earned. Question though, is the TSFA right for you, and should you use it as an retirement investment tool?

Well the simple answer is a resounding NO. But that depends entirely on who you are. Here are some issues to consider. TFSA holders must consider how they want to invest their cash such as higher risk stocks that yield high returns than a savings account. The gains are not taxable but investors should be aware that losses are not deductible.

But is it worth the effort for a retirement savings? The answer is depends. Fact is, TFSAs now have the same investment instruments as RRSPs. You can buy equity mutual funds or balanced funds, stocks, etc., with TFSAs.

So it’s not about whether you want to use a TFSA or an RRSP, because they both have the same opportunity. The question you must ask is whether you want to reduce taxable income today, or taxable income tomorrow. TFSAs mean ALL gains made won’t be taxable in the future, a big savings for tomorrow. However, RRSPs mean you don’t pay as much tax TODAY.

If you compare the two, if you were to start investing early in your 20s with a TFSA, and then later in life with RRSPs when your income increases, you’d come out on top. Of course, the name of the game here is all about balance. Talk to a financial adviser about your options. Also, remember to go beyond just the bank, they sell bank instruments and have that bias (I suppose all advisers have a bias, you just need to figure out what it is.)

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