‘BEST GIFT GOVERNMENT HAS GIVEN US’: THE LONG-TERM POWER OF THE TFSA HAS YET TO BE FULLY TAPPED
Danielle Kubes, Special to Financial Post
The TFSA is new enough that Canadians haven’t had time to experience its long-term investing implications, generally preferring to focus more on the S-for-savings.
But that could be a mistake.
“The TFSA is the ideal place for long-term equity investment and the power of it comes from that long-term compound growth and not as a savings account with cash in it,” says Steve Bridge, a money coach from Money Coaches Canada.
He gives the example of someone in a 40 per cent marginal tax bracket stashing $5,000 in cash at one per cent interest. They earn $50, so only save $20 from sheltering it within a TFSA. If you compare that to an equity investment that grows at 5 per cent, earning you $250, they’re now saving $100 in taxes.
“That’s five times the amount of just having cash in there,” he says. “If you add in the long-term power of compounding, now you’ve gotten yourself a powerful retirement tool.”
The best fit for a TFSA, most advisors will tell you, are equities that have steady and stable growth.
“It’s not a place for speculative securities,” says Ian Black, a fee-only financial advisor at Macdonald, Shymko & Company Ltd. “If it works out, you’re fine, but speculative more often than not doesn’t work out.”
Instead, Black suggests ETFs.
“Not just picking one or two stocks, but using more exchange-trade funds to get exposure; reducing the risk,” says Black.