In my practice, I notice that very few people maximize the full potential of their TFSA accounts. A recent RBC survey confirms my observation: it shows that 57% of Canadians invest their TFSA in money market funds and guaranteed investment certificates (GICs) at a low interest rate. Moreover, 43% believe this account serves only for saving and not for investing for their retirement. A liquid and secure investment in a TFSA is ideal for meeting short-term needs, but if their investment goal is long-term and ambitious, then investors would gain by opting for investments with a higher potential return. Don’t forget that a TFSA is a powerful tool for creating wealth since the income from investments will never be taxed while accumulating in the account, nor when sums are withdrawn.
Albert Einstein famously said that compound interest is the most powerful force in the universe. To take advantage of his advice, you need to invest as early as possible! Young millennials who maximize their TFSAs have every chance of accumulating $1 million sheltered from income tax for their retirement, but it's not too late for investors in their thirties or forties to amass hundreds of thousands of dollars for their later years.
From 2009 to 2020, Canadians aged 18 and over could have invested up to $69,500 in a TFSA, plus the plan permits carrying forward contributions that were not made. It's not unusual to see TFSA accounts maximized and invested in securities for the past ten years that are now worth more than $100,000. These investors are on track for the 1 million dollar goal!
As well as investing early and contributing regularly, you need to choose investments with strong growth potential in order to reach the one million dollars goal.* Historically, long-term stock market annualized returns are around 10%. By investing your TFSA funds in a well-diversified portfolio of securities with a more conservative hypothesis of a 6% return, here's what you could expect :
The table assumes a TFSA maximized every year and a 6% annualized rate of return. The ceiling of annual TFSA contributions is indexed based on an inflation rate of 2% and rounded to the nearest $500.**
One million accumulated in your TFSA account at retirement could generate an income of $40,000 a year, totally free of income tax, since the sums withdrawn from a TFSA are not considered taxable income. Also, withdrawals have no effect on Old Age Security (OAS) benefits. TFSAs, as we know, play an important role in withdrawal strategies; normally, we recommend making withdrawals from this account last since the income accumulating there is sheltered from income tax. Also, on passing, your beneficiaries will not have the tax burden associated with RRSPs and non-registered investments.
Sophie Paquet, Investment Manager and Senior Vice-President at National Bank Financial
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