The TFSA Explained
When you have two prospects ask the same question in a week, you have to write a blog about it!
“What’s the interest rate on your TFSAs?” (Tax Free Savings Account)
So, TFSAs don’t actually have interest rates, they are merely the “bucket” that holds the investment. In your TFSA, you can have cash, stocks, bonds, portfolios and other investments - that’s what determines the interest rate. Holding cash in a TFSA is not the greatest idea. Generally it will earn very little interest, and therefore there is nothing to tax shelter, defeating the entire purpose of the TFSA.
This question usually leads to a “Ok - back up, maybe I’m misunderstanding what a TFSA actually is - can you explain that real quick?”
A Tax Free Savings Account is an account that is funded by after-tax dollars, and you are not taxed on the growth of the investment when you withdraw your funds in the future.
“Ummm, what are ‘after-tax dollars’?”
When you work, you get paid. However, before that money hits your bank account, your employer withholds tax (you may owe more at tax-time or get a refund at tax-time, but that’s a whole other story!)
The RRSP (Registered Retirement Saving Plan) works in the opposite way from a TFSA. When you contribute to an RRSP, the government allows you to write it off against your income, so you get the money you were taxed back (many people erroneously think of this as free money and blow it on a vacation) but when you get to retirement and withdraw the funds, you have to pay tax then (remember that vacation money…).
Whether a TFSA or RRSP is better for you ultimately comes down to your income. Our industry calls it Tax Planning. A lot of the action happens behind the scenes, navigating the different tax brackets, but the goal is to lower and/or defer as much tax as possible, legally of course, so your money is working harder for you.
When we meet, we discuss your investment goals, concerns, time horizons and decide which “bucket” is best to put your money in, then we also decide what to actually invest in. We also answer all your questions along the way!