Back in 2009 when tax-free savings accounts (TFSAs) were first introduced by the federal government, not everyone was sure what to do with them.
Sure, it was great to have a registered investment vehicle where you could grow your money without paying any capital gains tax on withdrawal, but with a $5,000 contribution limit, it didn’t seem like much to get excited about. Which is why we ended up stuffing them with money for short-term goals and loading up on low risk, low return money market funds or GICs. And then, once we’d saved up for our vacation, car, or some other short-term savings goal, we’d cash the whole thing out.
But after five years – something really interesting has happened. The contribution rate was raised to $5,500 last year and amount of room Canadians have to contribute in their TFSAs has grown year over year between 2009 and 2014 – it’s now $31,000*.
Suddenly that seems like a really big emergency fund – or a very expensive vacation.
Maybe it’s time to admit that TFSAs are outgrowing their label as a place to park money for a short-term goal. And as that happens it’s also time to rethink the kinds of investment we’re putting in them.
While so many Canadians have been turning to low risk investments like GICs and money market funds in their TFSAs – the problem is the big benefit of holding assets in a TFSA is the fact that you don’t pay any tax on the gains. So technically you should be holding investments with bigger potential for gains – growth assets like equities for example.
Understanding the risk-return relationship of investing and your own comfort with risk as it applies to your personal financial goals and time horizon, are key to deciding how you want to utilize the benefits of a TFSA.
The question you should be asking is, are you making the most out of your TFSA – or are you still using it to park cash? If so, you might want to reconsider and add a little more risk.
* Editor’s Note: When we originally published this article, we mistakenly listed the contribution room as $25,500. This figure is now corrected. Thank you to our wise readers for pointing out our error!