I have an RA – do I really need a TFSA?

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Jan van der Merwe, head of actuarial and product at PSG Wealth

TFSAs can be a good investment choice for many individuals, because they are flexible and accessible and allow you to choose a variety of underlying investment options. The benefits really add up in the long-run though, so using these with a short-term view (withdrawing too soon) can mean you are not maximising the actual long-term benefit, which is way more powerful than the tax savings when viewed on an annual basis.

These are some of the questions most frequently asked about TSFAs.

If I have an RA, why would I need a TFSA?

You can normally only access a Retirement Annuity when you retire. TFSAs are completely flexible investments and you access these at your discretion. That said, there are benefits to remaining invested for the long-term. Moreover, because your investment income in a TFSA is not taxed, they also offer a tax advantage and are a good supplement to your retirement income.

What happens to my TFSA when I reach the maximum allowable life-time contribution? Contributions above the limits will be taxed at 40%. Therefore, it does not make sense to continue contributing when the maximum level is reached.

Is it likely that the maximum allowable contribution, monthly and annual, will change?

Government reviews the limits from time to time and the maximum has already been increased once since these products were introduced in 2015. So yes, the limits may be amended from time to time.

What investment risk-profile would be best for a TFSA (conservative, moderate, high-risk)?

This would depend on your risk profile and investment objective, and the answer would vary from one investor to the next. Those who have a longer investment horizon, should therefore consider investments into growth assets like equities, even though these are considered to carry more short-term risk.

Does it matter which TFSA provider I choose?

Government regulations ensure the basic features of TFSAs across providers are similar. That said, you should invest with a reputable company who can provide access to underlying investments that suit your investment preferences and that can offer you a holistic investment experience. As of March last year, you are also allowed to switch your TFSA between providers, so if you’re not happy you can make a change.

Are there ‘better’ investment vehicles available for discretionary savings?  

People often get caught-up in what the “best” choice is – but the answer will depend on what other provisions you have made, why you are saving, and when you want to access the investment. But remember that you would be wasting much of the real benefit if you use a TFSA as a bank account or for short-term goals. Also, remember the “vehicle” (the TFSA) is only one part of the savings decision. You should also consider the fund (underlying investment) you invest in.

TFSAs provide an important tax-based incentive for people to save in the long-term. They can definitely help investors to achieve better outcomes as part of their overall investment portfolios. It should be noted, however, that the overall lifetime limit means this cannot be the only component of your savings toolkit. It should be part of a well-considered investment plan.