Getting rich doesn't happen by accident. Sure, a few lucky folks may win the lottery and become instant millionaires overnight, but for the majority of us the best way to strike it rich is to work for it.
With the Tax-Free Savings Account (TFSA) though, all the heavy lifting isn't left to you. Your TFSA can do wonders to boost your savings and make you rich -- these five ways are a great start to padding your pocket book. As a quick refresher, here's the 5 Minute Guide To Your TFSA.
1. Harness the power of compound interest
Your TFSA allows you to take full advantage of the power of compound interest since your income from it is never taxed. Every dollar saved in your TFSA earns you income, and over time that money compounds with amazing results.
For example, investing $5,000 in a TFSA annually at 5% will total almost $850,000 in compound interest in 50 years. With your contributions totaling a quarter million dollars, it's stunning to see how the power of compound interest more than triples your investment making you a millionaire.
TFSA contributions: $5,000 per year
Rate of return: 5.0% compounded annually
Total amount contributed: $250,000
Total interest: $849,047
Total after 50 years: $1,099,077
When safely saved in your TFSA you get to keep every penny of compound interest.
2. Pay less cash to the tax man
If you want to pay less of your hard-earned cash to the tax man, then your TFSA is a surefire way to grow an investment and keep it for yourself.
For example, investing $5,000 in a TFSA annually at 5.5% will save you around $40,000 in taxes over 25 years. Your TFSA could total around $262,700 where in a taxable account you'd be left with just over $222,600.
TFSA contributions: $5,000 per year
Rate of return: 5.5% compounded annually
Income bracket: $40,000 - $79,999
Term of investment: 25 years
Tax savings: $40,069
Try the Government of Canada's TFSA Calculator to see how your income bracket affects tax savings.
3. Contribute as much as you can
Sure, contributing the maximum of $5,000 annually to your TFSA is ideal, but who has that kind of cash? The good news is contributing even a little bit of dough every year can make you rich.
If you can scrimp and save $500 a year for 35 years at 5.5%, your TFSA will be worth around $52,880. As a consistent saver you'll earn over $35,000 in interest with just a $17,500 total contribution!
TFSA contributions: $500 per year
Rate of return: 5.5% compounded annually
Total amount contributed: $17,500
Total interest: $35,380
Total after 35 years: $52,880
Even saving a bit in your TFSA can add up to big bucks over time.
4. Contribute at the beginning of the year
Here's a tip that costs you nothing -- contribute to your TFSA a the beginning of the year to maximize your investment growth and save much more.
For example, a person who contributes $2,500 on January 1st at 5% has around $33,017 after 10 years, while those who wait until December 31st of the same year end up with just over $31,445 -- that's an increase of $1,572 just by investing sooner. Planning ahead and contributing to your TFSA on January 1st and not putting it off until the end of the year could earn you thousands more over time.
5. Contribute with a spouse
If you have a spouse then you've just doubled your TFSA investing and compounding power. Since each person can contribute up to $5,000 per year, couples together have $10,000 combined annual space. After 25 years of maximizing their contributions at 5%, a couple could save over a cool half a million together with $251,000 earned from tax-free compound growth.
Your Turn: Are you contributing to your TFSA? Do you see the compounding power?
You use 5-5.5% rate of return in your examples. Which institution offers anything resembling that high a rate? Nobody! That's the myth of a TFSA.
Posted by: Will | 01/25/2010 at 10:29 AM
I have a TSFA account with BMO and it pays 1% interest only!
Can you do some research and see which financial companies offer more than that?
Posted by: Polly | 01/25/2010 at 11:34 AM
I find the TFSA best for a stock account, you know that you can have mutual funds, stocks, bonds ect in it right? Risk = Reward.
Posted by: Me | 01/25/2010 at 03:48 PM
This year my rate of return has been + 25%. You have to take risk to earn a better rate of return..buy stocks with known history.
Posted by: Jennifer | 01/25/2010 at 04:02 PM
Regarding Polly's question, ING is now offering their TFSA at an ongoing rate of 3%.
Posted by: W | 01/25/2010 at 06:20 PM
Regarding Polly's question, ING is now offering their TFSA at an ongoing rate of 3%.
Posted by: W | 01/25/2010 at 06:20 PM
The TFSA is great since money taken out is tax free.
If you are 45 years old Desjardins has a guarantee of 7% every for ten years more if the market goes higher. Income can be pulled out tax free, depending on ones age this income can be taken out for as long as the person lives. This may not be everyone's cup of tea but may make sense for some.
Posted by: Brian Poncelet, CFP | 01/25/2010 at 09:26 PM
Being rich is only true till the next ponsi, Madden, or Earl Jones takes it all away thru slick advicing. Even some top investment advisers rarely follow their own advice on RRSP saving due to affecting present lifestyle.
Common sense reason is in the future who would all those nice oldfolk spend all their money on? Wiffs of microsand instead of a anybody willing to work for old people? There are limits to economic balance as pre bond bankruptcy New Zealand and the Falklands even today prove all to true.
Iceland is a classic example of investment meltdown done by brilliant financial advice. There nothing wrong with panicking if the wrong people get punished for causing it in the first place.
Posted by: Bum Economo | 01/26/2010 at 01:22 AM
I have a TFSA at RBC Action Direct, purchased Bank of Nova Scotia stock and reinvested the dividends (DRIP) at years end it was worth $8000, a 60% rate of return. I don't expect this every year but anticipate double digit returns. The TFSA is for our grand daughter when she turns 21.
Posted by: Eric | 01/26/2010 at 02:43 AM
In response to Polly:
"You use 5-5.5% rate of return in your examples. Which institution offers anything resembling that high a rate? Nobody! That's the myth of a TFSA."
Obviously no bank offers that kind of a return. if you are saving for the long term (20-30+ years) as shown in the examples, you would be an idiot to only save money in banks. These returns are easily achievable by investing in the market. The rates that are shown (5-5.5) are your average rate of return over that many years, which is pretty modest actually. SO YOU ARE WRONG, IT IS NOT A MYTH! YOU ARE JUST FINANCIALLY UNEDUCATED!!
Posted by: Prab | 01/26/2010 at 03:02 AM
My first year return on my $5000 TFSA is between 120 - 140% I am fortunate enough to pick the right stock. For sure, this year will not have this kind of return. I am still target for 15-20%.
Posted by: rogfer | 01/26/2010 at 03:58 AM
You can't just count on the interest you get paid from the TFSA account.
Take your money and invest it in higher paying interest places such as Stocks, Bonds etc....
TFSA account interest will not pay you more than 3% most likely. No one offers a higher rate than that as far as i know.
When you invest it in different things you sure can make a whole lot of money..
Posted by: anonymous | 01/26/2010 at 08:26 AM
There seems to be some confusion between the TFSA and the investments within it. The TFSA is a an account as are RRSP's, RESP's etc. You can hold diffenent investment products within the TFSA depending on your risk tolerence, investment timeslines etc. Recommend that you sit down with a financial planner with a recognised FI to get the facts and help determine which investments are most suitable for you to hold in your TFSA.
Posted by: Mark | 01/26/2010 at 09:33 AM
As anyone is aware interest is the worst form of income you can have mainly due to our tax regime and the masssive political infrastructure it has to support.
Taking full advantage of the TFSA means ensuring that you have a portfolio of investments within the account umbrella containing those instruments with the greatest growth potential and a risk level that suits your tolerance.
Interest income has been most favorable to the banks and elast favorable to the consumer but at least the TFSA helps us to keep more of OUR money.
Posted by: Steve | 01/26/2010 at 10:35 AM
Hi,
Which bank or any other financial institurion pays 5%?
Love to know, i'm ready to inviest right now!!
Posted by: Ash | 01/26/2010 at 11:32 AM
Many people hear information on the TFSA from friends and are interested however not all information being shared is correct. I have the "official" rules and regulations behind what you can and cannot do. I would suggest looking beynd the banks for 2-3% returns. The private sector offers many great secure alternatives in land and oil and gas where 5-10 % or higher is a realistic return. Do your homework and look outside the box. I work outside the box and offer information and local presentations on TFSA vs RRSP. to find out more I am availabe at keithj@foundationcapital.ca at your convenience.
know your stuff and do your homework and yes GET RICH!!!
Posted by: KEITH JAQUES | 01/26/2010 at 11:38 AM
what a joke.
Posted by: al | 01/26/2010 at 01:00 PM
50 years , what a joke, one has to start at 20 years old ( at that age they don't have the money to invest ) and wait till your 70 years old to get the benefits. 30 years will be realistic.
Posted by: Claude | 01/26/2010 at 01:26 PM
The TSFA makes our Government look like they are doing us all a huge favour. What happened to the $2,000 interest annually that we used to get tax free from our bank accounts...it's gone! Bottom-line we are the most taxed people on Earth and in Ontario we will have a new HST tax (which taxes everything). Canadians in general like to complain when we are in our small social groups but never have we been organized to complain about our ever increasing taxes. I have been working for 30 years (and my life style although good), I know my quality of life was much much better in the 70 and 80s...we had more buying power. Our Gov't (all levels) have spent us all into higher taxes and we will never pay off our Govt debt. We should feel sorry for the next generation that will be inheriting our debts as a result of bad Government.
Posted by: DGR | 01/26/2010 at 01:42 PM
If you are a member of a pension program (teachers, OMERs, etc) and have put in for the full number of years, etc. any RRSP income when post-retirement will usually mean OAS clawbacks. TFSA income is not counted as income so you are not taxed on it when you use it. A good benefit over RRSP's should anyone be in this situation.
Posted by: Will | 01/26/2010 at 01:46 PM