Tax-Free Savings Accounts Are a Lie!
|Not really a fan of these memes.|
Wait, that didn't come out right. I love the Tax-Free aspect of a TFSA. The government can keep their hands off my money, thank you!
What I hate is the name.
They are extremely misleading. I know I made a rant about this in a previous blog post. However, when you are told something is a Tax-Free Savings Account, one would expect it to be a savings account that is tax free!
This is no where near the truth! However, 2009 me didn't know this. As a result, I signed up for tax-free high interest savings account. I also signed up wifey as she was new to the country and had no idea how everything worked. It's not like I knew how things worked as well, but we didn't know any better.
The interest rate at the time was a sad 1.5%. I didn't realize it at the time, but I was barely beating inflation. According to some Google searching, inflation for 2009 was 1.324%.
The CBC just released some numbers. Inflation in June was up 2.4%. In Ontario, inflation was a whopping 3%! So if you are using the high interest savings account of a big bank, they are only paying you 1%. You're losing money to inflation!
What no one told me was that "tax-free" was more of a container in which to hold different types of accounts and not just savings accounts. Very much like RRSPs. In fact, they should have called TFSAs Tax-Free Savings Plans (TFSPs) instead!
It took about 5 years before I realized this fact. It was after I read an article detailing a man who had an account balance of over $300,000 in his TFSA. I read the article and was surprised that he accomplished this by investing in stocks. Intrigued, I did some research on the interwebs and found that many banks (and discount online brokerages) offer tax-free investment options.
I feel like a sucker. For 5 years, I was switching banks to grab the best interest rate. Meanwhile, the stock markets have more than recovered from their 2008 meltdown. What a wasted opportunity. Of course, even thought I realized my mistake, it took a while before I figured out how I was supposed to invest in the stock market.
The point is, don't be fooled by the term Tax-Free Savings Account! You can earn so much more with a tax-free account than just putting your money in a savings account.
However, if you need the money in a few years, then maybe a savings account or a 1-2 year GIC is more appropriate for you. The last thing you need is a market correction and your investment is now worth 30% less. (Yay! </sarcasm>) If you don't need the money in the short term, then investing long term in the stock market is better. Even then, I don't mean individual stocks, I mean an index fund... but that's another topic of conversation altogether.