Stop using TFSA as a savings account. Use it for retirement!!!

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The Tax-Free Savings Account (TFSA) was introduced in 2008 by the late Jim Flaherty and came into effect on January 1, 2009. When it was created, the Conservative government boasted that it was a new tax-advantage account to allow Canadians and Canadian permanent residents who are 18 or older to set money aside to grow tax-free throughout their lifetime. The idea is to use the TFSA to save money for the large purchases you may have down the road.

In case you want to know more about the TFSA, please take a look at The Millennial’s Ultimate TFSA Guide I created a few years ago.

I applaud the Conservative government for creating a new tax-advantage account for Canadians to help us grow our money. Unfortunately, many Canadians aren’t fully utilizing their TFSA’s.

Stop investing in GICs in your TFSA

I am sure that you have seen those bank TFSA ads before. So and so bank states that you’d get a 2.5% interest rate if you open a TFSA GIC where the rate is much higher than the normal GICs you’d get.

Enticing right?

If you open a TFSA GIC and put in $6,000 at a 2.5% interest rate, at the end of the year, you’d get $6,150, or $150 in interest without having to pay any taxes.


But I’d argue that GICs are terrible ideas for your TFSA. If you were to invest in an index ETF instead, you’d get a much higher return. The historical stock market return rate is roughly 8%. So, if you were to invest $6,000 in an index ETF, like the Vanguard Canada All Cap ETF, VCN.TO, you could potentially end up with $6,480 at the end of the year.

I realize that with index ETFs, the return is not guaranteed. You can certainly end up losing money at the end of the year whereas GICs are guaranteed (hence the name Guaranteed Investment Certificate). But we are only looking at this analysis with a short term view. We should be using a long term view.

Say we leave that $6,000 for 10 years. For GICs, let’s assume that the interest rate stays at 2.5% each year, and for the stock market, let’s assume that the annual rate of return for the 10 years are: 4%, 6%, -30%, 15%, 20%, 12%, -5%, -5%, 15%, and 5%.

For GIC, you end up with $7,680.51.

For index ETF, you end up with $7,798.66. An extra $118.15.

Hold on, that’s not a lot of extra money in comparison and I took on a way higher risk with index ETF. What’s wrong with investing in GICs, you may be thinking…

Well, for the index ETF scenario, the average rate of return for 10 years is only 5%, which is much lower than the historical stock market returns.

What happens if we use 8%? You’d end up with $12,953.55, you have more than doubled your money!

If you are “saving” your money inside the TFSA for an expense within a year or two, it may make sense to invest that money in GICs. Otherwise, I believe you are better off investing that money in an index ETF (and dividend stocks if you wish) for longer terms.

Use a TFSA as a retirement account

For many Canadians, the default tax-advantage account for retirement saving is the RRSP (Registered Retirement Savings Plan), but there are many great reasons why you should start looking at your TFSA as a retirement account as well.

Unlike RRSPs, TFSAs do not have any withdrawal restrictions. When you withdraw money from your TFSA, it’s completely tax-free. Meanwhile, RRSPs have many restrictions, such as withdrawal tax, having to convert RRSP to RRIF by age 71, withdrawals are taxed as normal income, and once converted to RRIF, there’s a minimum withdrawal amount.

I don’t know about you but I don’t like restrictions and being told what I need to do, especially when it comes to my retirement.

And since the money you withdraw from a TFSA is tax-free, it doesn’t count as income. That means you don’t have to worry about making too much money and getting subjected to the OAS (Old Age Security) and other income benefit claw backs. All that means is more money in your pocket at the end of the day.

That’s why in our financial independence assumptions, we estimated that 37% of our dividend income comes from our TFSAs. If we can generate more dividend income from our TFSAs, that’s even better.

One thing to be careful is that you need to make sure you don’t over contribute to your TFSA. If you do, you will get a letter from the CRA and need to pay the TFSA over contribution penalties.

Use a TFSA and RRSP together

For retirement savings, it makes sense to use a TFSA and RRSP together. If you can, max out both the TFSA and RRSP every year. If you can’t, you will need to look at your tax situation and determine whether to invest in an RRSP or TFSA to allow for the most tax efficiency. For us, we try to keep things simple, so every year our goal is to maximize our TFSAs and RRSPs.

So, stop thinking that TFSAs are just for short term savings. Start looking at the big picture and start using your TFSA as a retirement vehicle. Your future self will thank you later.

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15 thoughts on “Stop using TFSA as a savings account. Use it for retirement!!!”

  1. TFSA as a retirement savings account can help optimize for future tax liability. I would favour high growth holdings (equities) in my TFSA and low growth holdings (bonds) in my RRSP. So say, hypothetically I have a 50K portfolio with 30K in TFSA and 20K in RRSP. If my asset allocation is 40% bonds / 60% equities, I’d put all TFSA funds in equities and all RRSP funds in bonds.

    • Why? Wouldn’t you have a balanced portfolio in both accounts. I have been investing 40 years and don’t see any benefit in your setup.

  2. Thanks! Yes that’s what I’m trying to double check. Is there anything in the Canada tax laws that prevents me from opening a separate, self-directed RRSP account?

    • Nope. I have a work RRSP and a self-directed RRSP account. You can have as many RRSP accounts as you want. Obviously that makes tracking your RRSP contributions a little bit more difficult. 🙂

  3. Yes please provide a referral code.

    Also, if I have a company RRSP that me and my employer are contributing to? Can I open a separate self directed RRSP or I must work with my company RRSP?

    • I sent you the referral code via email.

      If you have a company RRSP those are usually managed by someone so you can’t just buy Vanguard funds directly (unless the work RRSP account offers Vanguard funds, unlikely though). So to do so, you need to open a separate self directed RRSP.

  4. Hi Tawcan,

    If I wanted to use my TFSA to invest in Vanguard funds, how would I go about doing that? Vanguard will not let me trade directly from them and I’m very concerned about the high MER from some brokerage investment firms here in Canada. Which ones would be your recommendation? Thanks in anticipation.

    • You can invest in Vanguard ETFs if you have a self-directed TFSA account. That’s what we are doing as we own VCN.TO inside of our TFSAs. Questrade is the discounted broker that we use. If you are looking to open an account, let me know as I can provide you with a referral code.

  5. I should have invested in pot stocks or penny stocks that made it big in the TFSA, haha! Have you heard of the people with million dollar TFSAs?

    It’s my fave tax advantaged account as well.

      • You will only be audited if your account is flagged for day trading activity. If you bought a pot stock or any stock and it increased in value 100 times you haven’t done anything wrong or illegal. If you are constantly trading in your TFSA then you are in trouble.

  6. Got to love the tfsa account. I agree sime people are to conservative with their money investing into gics.

    Im guilty of having a cash tfsa acount though. One of the stipulations to get free banking with rbc is to have 500 cash sitting in a basic tfsa account.

    Its worth it though as im saving 15$ a month.
    All our other investments in the tfsa are working for us in the market. =)

    Gotta work on maxing these accounts out though!

    cheers Bob

    • Yup TFSA is great, so glad there’s such tax-advantaged account available to Canadians. Sounds like having $500 sitting in a basic TFSA account to save $15 a month makes a lot of sense in your situation. Even if you were to invest that $500 into RY stocks, you wouldn’t get $180 in dividend back in a year’s time.


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