The Tax-Free Savings Account (TFSA) has come a long way since its debut 11 years ago. According to Statistics Canada, nearly 40% of Canadian families own or manage a TFSA in 2019. If you compare it with the 63-year old Registered Retirement Savings Plan (RRSP), the uptake is impressive. Presently, more people have a TFSA than an RRSP (57% versus 52%).
No investment vehicle in Canada beats the flexibility of and tax advantages from a TFSA. If you own a TFSA in 2009 and used it correctly, you would be richer than you are today. Based on the survey results of Ipsos done for the Royal Bank of Canada in 2019, 42% of users have more cash sitting idly in their TFSAs.
Proper use of the TFSA
People are moving to cash during the pandemic. It’s understandable if you want to stay liquid in a crisis. It would generally be safer to set aside at least three to six months’ worth of emergency savings. You won’t worry about the value of your investments dropping due to a volatile market.
The point here is that your TFSA is not a regular savings account. You miss out on the magic by using the account as mere cash storage. If you can invest a portion of your money within a TFSA, you should do so in order to benefit from tax-free compounding. Holding interest-bearing investments in a TFSA makes good financial sense, too, whether you’re running after a short and medium-term goal or building a nest egg for retirement.
Furthermore, the Canada Revenue Agency (CRA) can’t touch your earnings or gains, except when you over-contribute or abuse it to create business income. You can withdraw any amount for any reason, anytime, without incurring a tax penalty.
More advantage to retirees
The TFSA and RRSP are complementing investment accounts, especially for retirees. Assuming you’re over 71 years old and have maxed out or no longer eligible to make RRSP contributions, your TFSA can function as a catch basin or secondary savings tool.
A fine holding
A TFSA is a fantastic long-term accumulation vehicle. Many users prefer dividend stocks over other eligible investments because of higher returns. Fast track your tax-free money growth by reinvesting the dividends.
Income investors hold bank stocks in high esteem, particularly the Big Five banks. But below them worth considering is a $2.52 billion regional bank. Canadian Western Bank (TSX:CWB) is a dividend all-star for its unblemished record of raising dividends for 30 consecutive years. It pays a 4% dividend.
CWB’s concentration is highest in Canada’s Western provinces. Its strongest suits are general commercial, equipment financing and construction and real estate project financing. Equipment leasing is the bank’s specialty with a 44-year long-established history.
Last, CWB is a Schedule 1 bank in Canada and seventh-largest in the banking sector by market capitalization. To benefit would-be investors, CWB aims to achieve a 7% to 12% EPS growth over the medium term. Management also plans to maintain a 30% payout ratio.
Reach your goal faster
Please don’t pass up contributing to your TFSA to realize its real advantage. You get closer and closer to your financial goals when you max out your annual contribution room every year.
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Fool contributor Christopher Liew has no position in any of the stocks mentioned.