Tax Free Savings Accounts are popular, but many Canadians are choosing only interest bearing TFSA plans that pay so little that the accompanying tax savings are negligible. This is generally what your financial institution will suggest, because it is simple and easy for them to set up and there is no advice required. The teller takes your money and signs you up and the teller gets a sale( one of the performance measurements for the job). Everybody is a winner except the investor.
With low interest rates of about 2% offered by your banking institution $5000 earns $100 in yearly interest which is actually less than the inflation rate. If you are paying a 30% rate of income tax you save $30.00 in tax, not exactly a windfall.
A study by one of the major banks found that 90% of TFSA’S are in term deposits or high interest savings accounts. The same mistake is often made today with RRSP’S. Self directed TFSA’S and RRSP’S can invest in stocks, bonds, mutual funds, segregated funds, and ETF’S as well as interest bearing securities. The point of the TFSA is to save on the income tax you earn on your investments, so the better the return you earn, the more tax free money you keep in your pocket. A better option for TFSA investments is dividend paying stocks or segregated funds, both of which will have returns in the range of five to seven percent.
To Find out more about investing your TFSA in dividend paying stocks and segregated funds. Contact us.