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?
What institution offers 5% on a GIC or regular savings for a TFSA? Don't you have to invest in the stock market for that rate? If so, you can lose a large portion of your $5000. Most of us experienced that! As a senior, time is not long enough to regain the loss! You could just as easily lose 25%, since at that rate you are in a high risk category. Maybe the TFSA is only for younger people who have years to invest in these kind of stocks and loads of time to regain their losses!
Posted by: melsay | 01/26/2010 at 02:56 PM
Your advice may be sexy and delicious and fun but you are totally unrealistic and your advice is ultimately dangerous. If you are going to suggest anyone can find a rate of 5.5% annually you should also point out the risks associated with such a rate - no savings account is guaranteeing anything remotely close to that these days. Why do you want to encourage people to have unrealistic expectations?? Stop already. Encouragement from people like you is the reason the system is in such a shambles.
Posted by: will | 01/26/2010 at 03:39 PM
Gotsta luv these experts who enjoy running numbers by folk at a high rate of speed. Slow down lady - I don't have 50 years of life left, of that I am quite sure. Perhaps your 5% interest rate goes back to the days when inflation was 20%, right? Point me to someone who saved money for 25 years and didn't touch it - I'll show you 50 people who had to touch that account. Stop spinning the numbers game on us already. I agree getting rich doesn't happen by accident, but listen to your numbers con game won't help one bit. Smoke on that!
Posted by: vapor | 01/26/2010 at 03:43 PM
Achieva financial has 3.6 %
Posted by: mike | 01/26/2010 at 03:58 PM
Ehh! If the percentage of the population right now is in the mid 50 (baby boomers) then we dont have 50 years to wait let alone have $5000 per annum to save....
Posted by: James | 01/26/2010 at 05:36 PM
Who is this person trying to impress? and or, working for?
My first year of the $5000 at the credit union, produced !$150 interest. Please ask him or her, to do a little more honest research before any more writings
Thank you and keep smiling eh!
Posted by: lofty waters | 01/26/2010 at 05:52 PM
If you believe that the GOC will let you accumulate a whole bunch of money in any account while they get reduced tax dollars . . . I don't believe it . . . they can change the rules anytime they please and they will. TFSA sounds good but if it works out good for taxpayers, Revenue Canada will get you one way or another.
Posted by: Jasper | 01/26/2010 at 06:04 PM
Which Bank paid for this Fairy Tale? 5 Percent...what a dope-smoking article this was!
Posted by: Eric | 01/26/2010 at 06:20 PM
I have not heard of any financial facility offering 5% on a TFSA. I think you are misleading the general public. The usual interest paid on accounts is more like 2%. Your calculations are also based over 50 years, by that time l will be pusing up the daisies. Even if l was starting out at the eligable age of 18, l most likely would not have $5,000.00 a year to save.
Posted by: Katherine | 01/26/2010 at 06:52 PM
Correct, people. No bank offers that rate of 5%. The bank is not your friend. Get your money out of a bank and into some financial fund that goes to the markets for proper investments instead of some bank account. The bank makes money from your money, you don't.
Posted by: Willliam Eby | 01/26/2010 at 07:12 PM
You can move your tfsa money over to a tax free mutual fund and depending on the markets you can get 5% or more on your $5000 contribution. My initial contribution of $5000 last year is up to $5700 a year later
Posted by: Richard | 01/26/2010 at 10:50 PM
The advice must be coming from a Personal Financial Advisor - totally unrealistic and misleading. 5% return and invest for 50 years. Be real.
Posted by: DYap | 01/26/2010 at 11:27 PM
The advice must be coming from a Personal Financial Advisor - totally unrealistic and misleading. 5% return and invest for 50 years. Be real.
Posted by: DYap | 01/26/2010 at 11:27 PM
There is an add by Ally just above your article saying they are paying 2.0% on TFSA. Where did you find an account that will pay 5.0%???
Posted by: doug | 01/27/2010 at 01:00 PM
Ok so I'm at a bit of an advantage. I am a tax accountant with about 5 years experience. So TFSAs aren't necessarily any better than an RRSP and often aren't as good. Think of it this way earn $5,000. If put into an RRSP $5,000 goes in. If into a TFSA only $3,000 goes in (assuming 40% tax rate). Over 3 years have that money double. $10,000 in RRSP comes out at 40% tax so there is $6,000 left. $3,000 of TFSA doubles also giving you $6,000. If the tax rate is still 40% when you pull it out you will have no difference between RRSP and TFSA (TFSA = tax at beginning which is equal to RRSP = tax at end if tax rate doesn't change). So the only financial benefit of a TFSA is if your tax rate actually increases when you go to remove it (which for most of us isn't likely as tax rates tend to go down in retirement unless you over invest in RRSPs getting the value about $500,000 which will lead to top rate tax on the withdrawal). So unless you don't want to lock money up in an RRSP (a legit idea) I would stick with RRSPs first until you run out of room. Also note TFSAs are nice if you don't have active income which generates RRSP room.
P.S TFSAs don't have to be tied to a bank investment. I would highly recommend a strategically diversified portfolio as 8-12% isn't that difficult over the long run.
Posted by: Accter | 01/29/2010 at 02:23 AM
TFSA accounts can hold any type of investments: GICs, stocks, mutual funds, etfs, index funds.
The 5% return assumption is perfectly reasonable over the long term.
Posted by: Four Pillars | 01/29/2010 at 11:27 PM
To get the 5% or more interested find a high yield mutual fund and invest in it. my current Mutual fund has a yield of 6.5% and is professionaly managed. On top of the 6.5% the markets are down, which means I can also make money off if the stocks held in the Mutual fund go up, also stocks that pay high dividends are more protected when the markets go down. Yes Higher risk, but I'm willing to take it
Posted by: hockey tips | 02/01/2010 at 11:17 PM
people, you are getting confused with the 5.5% return! it is the return on investing your TFSA with mutual funds /stocks just like a RRSP can. the 1-3% returns people here saying the banks are offering are high interest savings account within the TFSA. You can invest in mutual funds too and 5.5% is a reasonable rate of return over time.
Posted by: yo | 02/09/2010 at 02:29 PM
Please explain why and how contributing to a savings account just before the end of each year earns less interest than contributing at the beginning of each year. Assume the interest is compounded annually as in item #4 above.
Posted by: Drop | 03/05/2010 at 03:31 PM
As per example #4 above. How is the earnings affected if the contributions are made out of every weekly paycheck all year long. Again, the interest is compounded on an annual basis. If I have a balance of $1000 accumulated contributions plus interest at the end of 2008 and make weekly contributions all through the year 2009 totaling $800, what will be my total accumulated contributions plus interest as of 12/31/2009 and how is it calculated? This is SOOOO IMPORTANT!
Posted by: Drop | 03/05/2010 at 03:42 PM