The Tax-Free Savings Account (TFSA) is a savings account. The money that is paid into it can be paid into different types of products. In addition, the investment income generated by the products in a TFSA is tax-free. Do you know what you can invest in your TFSA? If you opened a TFSA account a few years ago, or if you’re thinking of opening one in the near future, there are many options beyond the regular savings account.

To help you reach your goals, it may be time to review your savings strategy. The three frequently asked questions below will help you make the best decision for your situation and goals.

What does non-taxable investment income mean?

The TFSA is a very flexible savings tool that can allow you to generate tax-free income through the savings products you include. It allows you to plan and give life to short, medium, or long-term projects, such as a trip, a down payment for a car, renovations, or improving your income in retirement.

In practical terms, this means that if you contributed $1,000 to a Guaranteed Investment Certificate (GIC) that you put into your TFSA, at an annual rate of return of 2%, you would earn $20 at the end of the year, and that money would not be subject to your tax bill.

Withdrawals from your TFSA are not taxable, since the money you save comes from your take-home pay.

Do you know your TFSA?

When opening a TFSA for the first time, some people opt for a regular savings account. Generally speaking, this is a bank account where your money can grow, but at a lower rate – usually 1.5% to 2%, with an average rate of 1% or less in 2020, which is below the inflation rate. This type of investment has a fairly low earning potential.

If your investment income is lower than inflation, you will not accumulate enough money to cover the rising cost of living. By investing in other products that have the potential for higher returns, and whose income is not taxable, you’ll get more for your money.

This diagram illustrates the capital accumulated over five years for a guaranteed savings product and a non-guaranteed product. The simulation is based on an investment of $1,000 in a savings account with an annual rate of return of 0.80% and in the RRSP+ at the Fonds de solidarité FTQ, based on the value of share A between 2016 and 2020.

Remember, however, that, generally, the higher the income potential, the higher the risk. Take the time to assess your risk tolerance based on your investor profile.

What products should you put into your TFSA?

Versatile like an RRSP, the TFSA, which is a savings vehicle and not a product, allows you to invest in a wide variety of financial products, such as mutual funds, GICs, stocks, bonds, etc. It’s up to you to choose according to your needs and savings objectives! Here are the main features of the different products available to you.

Mutual Funds (MF):

Mutual funds are managed by fund managers, while their assets are managed by portfolio managers. The portfolio managers invest all of the investors’ money in investment products that meet the fund’s objectives and follow the investment policies established by the fund managers.

To achieve the desired goal, there are different mutual funds: fixed income, balanced, equity, international, and money market. The return, and therefore the risk, depends on the investments made. With the FlexiFonds, the Fonds de solidarité FTQ offers three investment profiles: conservative, balanced, and growth funds, all of which meet distinct investor profiles.

The mutual fund has no maturity date and can generate returns in the form of dividends, interest, capital gains, etc. It is redeemable at any time and its securities are not guaranteed.

Guaranteed Investment Certificates (GICs) and Bonds:

GICs

GICs are debt securities issued by financial institutions, to which you lend money through these securities. In exchange for this loan, you will receive interest. The interest rate is fixed from the time of investment to the time of maturity.

GICs cannot usually be withdrawn and will have to be held until they mature, which will be in one to five years on average. There are a few exceptions, but expect to pay a penalty if you withdraw your GICs prematurely.

Your money is safe because the amounts invested are generally guaranteed by the issuer and your principal is protected by a deposit protection plan, under certain conditions, in case of issuer bankruptcy.

Bonds

Like GICs, with bonds, you lend your money to an issuer – a company or government – who in turn pays you a fixed amount of interest at a certain frequency. At the maturity date, which can be from 1 to 30 years from now, the issuer must pay you back the full face value of the bond.

The value of the bond varies according to interest rates, but also according to the issuer’s credit rating.

Held to maturity, the bond allows you to receive the interest expected at the time of purchase, unless the issuer is no longer able to meet its obligations.

Stocks

When you buy stocks, you own a share of the capital of the company that issued them. Shares have no maturity date and can provide a return in the form of dividends or capital gains. They are traded on stock exchanges or over-the-counter markets.

Both the risk and the return prospects are high with stocks, as their value can rise and fall significantly. If the company is dissolved, you will be entitled to a share of the remaining assets, but only after all other creditors have been paid. In addition, holders of preferred shares have priority over holders of common shares.

 
The TFSA is a savings vehicle that offers many possibilities, much more appealing than keeping your savings in a simple savings account! If it’s been several years since you opened a TFSA, it may be time to check with your financial institution to see what types of products you have invested in. By making the right choices based on your investor profile and objectives, you can maximize your returns and ensure long-term income. It is possible to hold several TFSAs for different objectives, as long as you do not exceed your annual contribution limit. It may be a good idea to get a second opinion on your investments to ensure you get the best out of each one, with the help of FlexiFonds, for example.

By Fonds de solidarité FTQ

Fonds de solidarité FTQ