Time to get aggressive with your TFSA.note

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DARCY KEITH

The Globe and Mail

Published Thursday, Jul. 25 2013, 6:00 AM EDT

Last updated Thursday, Jul. 25 2013, 2:47 PM EDT

It’s time for Canadians to stop playing it safe when it comes to the tax-free savings account.

When the TFSA was born in 2008, it was celebrated as a way to stash some cash into a piggy bank

that the taxman could never touch. It increased the appeal of saving up for a rainy day, or for a major

purchase a few years down the road.

But the initial maximum contribution of $5,000 that could go to a TFSA has now ballooned to $25,500

for every Canadian over the age of 18. And it’ll keep growing by at least another $5,500 every year.

(Keep in mind a person can only make a one-time contribution of $25,500 if they’ve never made a

contribution, or if that person had earlier withdrawn that amount. For someone who has steadily been

socking away $5,000 for the last four years, they would only be eligible to contribute the $5,500 limit

of 2013.)

That’s quickly adding up to much more than just an account to draw from for a new sofa, European

vacation or even an automobile. To put it in perspective, a 25-year-old who started making a full

contribution into the plan when it premiered, and continued to do so every year until he or she retires

at age 65, would have socked away more than $215,000 that could grow and later be withdrawn

without any tax implications.

If we assume a five per cent annual rate of return from the investments held in the TFSA, that would

add up to close to $750,000 by retirement, thanks to the power of compounding. A couple who

diligently saved over that 40-year period could have $1.5-million in retirement savings by age 65 –

and not a penny of that would ever go to government coffers.

That differs greatly from registered retirement savings plans. All contributions and investment income

earned in RRSPs are subject to tax once withdrawn. And those withdrawals from RRSPs could

trigger clawbacks for Old Age Security (OAS) or other federal government-funded programs,

depending on income level and other factors.

Achieving a 5 per cent return shouldn’t be hard. History strongly suggests, for instance, an

investment in equities could well exceed that; consider that stock markets in the developed world

annually returned 8.5 per cent over the last 112 years,

.

Time to get aggressive with your TFSA

according to the Credit Suisse Global Investm

ent Yearbook

The problem is that many Canadians aren’t taking full advantage of TFSAs, because they are

choosing to put those funds into ultra-safe investments, like guaranteed investment savings and high-

interest savings accounts. Little risk, but piddly returns – one, maybe two per cent if you’re lucky.

, RBC, shows its clients have a whopping 65 per cent of their TFSA

holdings in either a high interest saving account or GICs.

For Canadians who simply want to save for near- or medium-term needs, that’s probably a good

thing. But those who are not planning to withdraw their TFSA funds for years to come need to look at

other strategies.

One that I like: buy investments that offer two ways for bulking up a portfolio. Dividend stocks, for

instance, provide income as well as the potential for capital gains. There’s some volatility associated

with this, but investing in blue chips and broad-based exchange traded funds help to level off this risk.

And it’s reassuring to know that when stock and unit prices fall, the income streams will help to offset

losses.

One downside is you can’t write off capital losses in a TFSA. But that shouldn’t be a huge issue when

constructing a well-engineered, balanced portfolio for the longer haul.

And here’s another idea: spread out the risk. Hold different baskets of TFSA investments based on

future needs, broken down by short-, medium- and long-term goals. The longer the timespan, the

more aggressive the investment.

Planning to take an extended period off work in a couple years? Think about how much you’ll need,

and then invest conservatively for that portion of your TFSA, perhaps with GICs or a high-interest

savings account (and ones that offer above-average returns, such as a Manitoba credit union.)

For the longer term, consider equities, exchange traded funds or mutual funds that are much more

likely to significantly bolster the size of your savings in the long run.

Of course, many of us simply have too many other demands on our income to sock money away into

a TFSA. And RRPSs and RESPs can certainly have their advantages based on such individual

circumstances as income and retirement goals.

But even modest contributions into TFSAs can grow into rewarding figures. The ability to save can

also rise considerably later in life, when personal incomes tend to go up with increased job

experience, and the monetary demands of raising children diminish.

The TFSA can pack a powerful punch when it comes to wealth building. But it’s up to us to realize its

potential. The time to do so has arrived.

Data from Canada’s largest bank