Beloved by investors, the tax-free savings account is one of the greatest tools Canadians have for increasing their after-tax wealth.
For those unfamiliar with the TFSA, it’s like the inverse of an RRSP. With an RRSP, you are using pretax dollars, which means you can deduct your contributions from your income for tax purposes. When you withdraw from your RRSP – ideally in retirement – the withdrawals are taxable.
With a TFSA, you use after-tax dollars to contribute.
It’s a choice between paying tax on your income now (with a TFSA) or later (with an RRSP).
Your TFSA money can be invested in a variety of ways, including stocks, bonds, mutual funds and exchange-traded funds. The growth in your TFSA investments is then tax-free, forever.
But that tax-free growth is exactly where some go astray. The allure of massive, tax-free investment returns makes many investors salivate at the potential upside. They buy high-risk investments such as individual growth stocks, dreaming of hitting a tax-free home run.
And they rarely consider that they might strike out.
Mark McGrath
Discussion