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The best worst-named investment in Canada: Getting the most out your TFSA

Outlining the TFSA investment options for short and long term goals, CWB’s Natasha Jahrig emphasizes the importance of knowing what you’re saving for.

Despite its widespread popularity, the TFSA is often misunderstood, thanks largely in part to its misleading name. Introduced by the Canadian Government in 2009, the Tax-Free Savings Account isn’t actually a savings account at all, but what’s referred to as a registration or a registered product. That means it acts more like a bucket, capable of holding a variety of investment products, and its returns are exempt from tax (the ‘Tax-Free’ portion of the name, thankfully, still holds). For CWB Account Manager Natasha Jahrig, aligning the right TFSA investment with her clients’ goals is a crucial part of her client-driven approach to financial planning.

Saving for the short-term

When working with clients that have savings timelines between six months to a year, Natasha outlines the benefits of using a TFSA as a cash savings account. “I’ve had a number of clients that have utilized their TFSAs products for shorter-term investments,” she explains. “It has worked really well for them because they get a good interest rate for a shorter-term investment and they don’t have to pay taxes on the growth, so they’re able to save more efficiently for that shorter-term goal, such as a trip or a car.”

Other short-term goals could include saving for the downpayment on a house or even contributing to an emergency savings fund. For any of these ends, one element Natasha emphasizes to consider is accessibility—how easily you can take money out of the TFSA if needed—as access will differ depending on the investment.
“If someone is using the TFSA as a long-term investment, then we may look at something like mutual funds or GICS, or if it’s a short-term investment, like they’re saving for a car and they’re going to be using the money within six months, maybe we put it into a cash account.”

Saving for the long-term

As a client’s investment timeline expands beyond one year, such as when planning for retirement, Natasha places more emphasis on risk tolerance and what a client’s anticipated income will be at the end of the investment period.

“If they’re going to have a similar income, or more, at retirement than in their working years, then a TFSA would be a good registration for them,” Natasha offers. “Because when you withdraw from your TFSA, there are no tax consequences, you’re not adding to your taxable income; that’s one of the biggest differences.”

When it comes to risk, Natasha understands everyone’s tolerance will be different. With this in mind, she recommends several options to her clients. “A GIC is really suitable for someone who is risk-averse, someone who isn’t looking at incurring any kind of volatility,” she says. “It’s the right option for someone who is comfortable with locking their funds in for a specific period of time and preserving their capital.” On the other hand, Natasha understands that for some, market risk is a welcome addition to their portfolio, particularly if they have other investments to fall back on. “You may have a client that says they have other funds, ‘This is just my long-term plan and I don’t mind incurring a little risk’, maybe we put all of that in the market, such as in mutual funds.”

Of course, it’s always possible to diversify, balancing investments that offer short-term security and accessibility while benefiting from riskier, long-term growth. “Maybe they want some funds liquid, some for the long term that they’re comfortable incurring a little risk and maybe they want some that they want to keep in a safer investment such as a GIC,” says Natasha. “We can help them find the right combination.”

In the end, it’s all about you

All in all, Natasha underscores the importance of working with someone that understands your unique financial needs and helps you work towards the future you want. “Find someone that you trust to work with who’s going to make a personal suggestion for you based on what your goals are. There are no absolutes. I’ve had so many people say that ‘RRSPs are not good investments, don’t invest in those!’ or ‘Investing in a TFSA is good’, but there are no absolutes. It really is dependent on the client and, overall, your situation is personal to you.”