Unlocking TFSA Potential: Strategies for Canadians With Untapped Savings
A recent TD Bank survey found 39 per cent of Canadians use their tax free savings accounts (TFSAs) to hold cash rather than investing.
Cash alone in a TFSA is pointless considering it yields close to nothing and the TFSA’s primary advantage is to avoid taxation on investment gains.
The proportion of Gen Z and Millennial cash hoarders was higher at 41 per cent, which makes it worse considering all the years that cash has the potential to compound as investments.
Some younger respondents said they wanted the money readily available even though investments in a TFSA can be sold and withdrawn as cash at any time.
High cash levels in other government-registered investment plans might make sense. Unlike a TFSA, contributions to a registered retirement savings plan (RRSP), registered education savings plan (RESP), and first home savings account (FHSA) are income tax deductible and can significantly lower the average household tax bill.
Better ways to deploy cash in registered accounts
Others survey respondents said they wanted to accumulate cash for investment opportunities, and some didn’t know what products to invest in.
Dormant cash in a basic registered savings account generates close to no interest and could actually lose value when you factor in fees and inflation.
A better alternative that provides the same level of liquidity is a high interest savings account where annualized interest payments are currently between 2.5 per cent and 3.5 per cent.
Rates on high interest savings accounts are subject to change as broader interest rates rise and fall, but guaranteed investment certificates (GICs) lock in rates for fixed terms.
If an investor can commit, a one-year GIC currently yields about 2.9 per cent.
GIC yields tend to get higher as terms to maturity get longer.
Many investment advisors recommend laddering, or staggering, maturities over time to create more frequent maturities to access the cash for other investments.
On the equity market, dividend stocks and structured instruments including real estate investment trusts (REITs) can also add to the cash stream. It’s important to know equity prices fluctuate and dividends are paid at the discretion of the company.
Better yet, pay down debt
One alternative for cash outside a registered account is to pay down debt.
By the summer of 2025, household debt topped $1.75 for every dollar of income.
The payback rate runs from mortgages in the low single digits, to student and consumer loans in the teens, to 29 per cent on some credit cards balances.
In most cases paying down debt is the best deployment of cash to keep your debt from growing at a faster pace. Even paying down debt at ten per cent will outpace inflation. It’s like a guaranteed return of ten per cent.
If you own a home, even increasing mortgage payments will put more of your cash in home equity and leave less interest for the banks.
Drain your emergency fund
Some big banks advocate for maintaining a low-interest emergency cash fund equaling three to six months of monthly expenses.
That cash can be put to better use by either paying down debt or saving taxes in a registered account.
Setting up a line of credit with your bank allows you to only access cash in the event of an emergency. Homeowners can get the best rates by securing a loan through a home equity line of credit (HELOC).
Even a higher-interest consumer loan could make sense in an emergency as long as it is paid off promptly.
This article was first reported by BNN Bloomberg
