Your TFSA Is a Great Way To Save (And Invest) for Retirement

This post is a sponsored collaboration with BMO SmartFolio, but all opinions and stories are my own.

When you think about saving for retirement, do you think about your Tax-Free Savings Account (TFSA)? If you’re not, you should—for a few reasons.

Sure, your TFSA might not earn you tax benefits now, but it comes with huge tax benefits later: When you withdraw your money from a TFSA, you don’t pay any tax on the withdrawals, including any growth within the account.

That’s a huge perk, especially if your TFSA is an investing account.

Let’s take a look at how you can make sure your TFSA is working as hard as it can for your future–and how BMO SmartFolio can help make investing within your TFSA simple.

How the TFSA works

Here’s the (very) short explanation of how your TFSA works: Any money you earn, either as interest or investment earnings, inside of your TFSA is tax-free.

Most Canadians—69% according to BMO’s latest investment season study—have a TFSA, and we use it for a variety of goals, including saving for big purchases and stashing our emergency funds.

If, for example, you put $10,000 into a TFSA in a savings account, and it earns 2% interest per year, after a year you’d have $10,200. That $200 you earned is totally tax-free, because it was inside of a TFSA.

There are limits to how much you can contribute though, so that this isn’t a tax-free free-for-all, but your contribution room accumulates every year that you’re eligible after the age of 18.

Every year after that, even if you don’t have a TFSA or earned income, you get that year’s contribution room added to your total, and you can use it anytime. For 2019, you’ve got an extra $6,000 of contribution room (up from $5,500 last year) and if you don’t use it this year, you can use it any year in the future.

PSA: If you were 18 or over in 2009, as if this year you’d have $63,500 of available contribution room, minus anything you’ve already contributed. If you were younger than 18 in 2009, your contribution room would be different—but no matter what, you can check your available contribution room in your CRA MyAccount.

If you’re not able to max out your TFSA with retirement savings alone, it’s a great way to save everything from your emergency fund to a house down payment, because you’ve got tax-sheltered growth and really easy withdrawals. You won’t be tied to a strict repayment plan if you withdraw your money, and on top of that, if you withdraw money from your TFSA this year, you can put that same amount back in next year on top of next year’s contribution room!

But although most of us know the TFSA is great for saving, it’s even more powerful when it comes to investing for retirement.

Why investing, not saving, is so powerful inside your TFSA

So $200 in tax-free bank interest is great, but what about $2,000 tax-free? Or $200,000?

That’s what you could be looking at when you invest for the long-term inside of your TFSA. Take the $10,000 you had in the previous example, and let’s say you invested in inside a TFSA with BMO SmartFolio instead of leaving it in a savings account, because it’s part of your retirement savings and you’re planning to leave it invested for 25 years.

With your BMO SmartFolio TFSA, your money is invested in a mix of exchange-traded funds (ETFs) to suit your investment objectives and risk tolerance, and your model portfolio is managed by a team of investment pros. Plus, investing with SmartFolio is as easy as setting up a regular contribution from your bank account—aka yes, it’s as easy as contributing to a savings account, but your money will work way harder for you—and you can get started with as little as $1,000.

Thanks to the fact that you’re investing, your money has the potential to grow much more than 2% per year depending on your objectives and your risk tolerance. Since you made the smart move and invested with a service like SmartFolio that charges low fees, you kept more of that money too.

When you go to withdraw your money, all of the growth within your SmartFolio account is yours—no tax to pay. You get to keep it all, minus applicable transaction fees.

Your TFSA is a stellar retirement account

While an RRSP is often top of mind when it comes to how you should invest your retirement savings, there are several reasons your TFSA should be part of your retirement strategy.

In retirement, any money you withdraw from a TFSA doesn’t count as income. That means you won’t need to pay taxes on them—a big perk!—but it also means that your withdrawals won’t count towards clawing back any income-tested benefits you might be eligible for. And hey, if you end up retiring a rich lady thanks to boatloads of savings or a nice pension, your TFSA withdrawals will keep you out of an even higher tax bracket.

It’s a good problem to have, sure, but if you can avoid it, why not?

Plus, if you’ve ever compared your salary to your take-home pay on your paycheque, you’ll know that paying taxes is not cheap on your regular income. That’s something you’ll skip entirely on retirement savings inside of your TFSA.

Finally, investing in your TFSA is your best bet when your timeline is long-term, which most often means longer than five years. Investing for a retirement that’s decades away is one of the most powerful ways to really make the most of your TFSA—and thanks to BMO SmartFolio, it’s easy to do.

How to invest inside a TFSA

While most of us know how to open a savings account, it can be a bit more of a stretch to open an investment account, especially if you’ve never done it before. But opening a TFSA is largely the same process, whether you’re opening a savings account or an investment account—you just need to find a service like BMO SmartFolio that makes the investing part easy.

With SmartFolio, you can open an account in under 20 minutes, and it’s all done online—no need to visit a branch unless you want more hands-on support opening your account. You’ll be matched with a model ETF (exchange-traded fund) portfolio that suits your investment objectives and risk tolerance, and your portfolio is managed by a team of investment professionals that adjust your holdings to take advantage of market movement. As a bonus, you have access to a team of SmartFolio advisors who can answer questions related to your investments or the market in general—which is something you just don’t get with a savings account.

Plus, you can easily set up automatic contributions to your SmartFolio TFSA to keep your portfolio growing, and that’s really all you have to do—it’s as easy as setting up automatic contributions to a savings account, and your money will be invested according to your objectives and portfolio.

When you’re ready to withdraw your money, you won’t need to pay any tax on the growth, dividends, or interest you earned inside of your TFSA. If that doesn’t convince you that your TFSA is a great way to invest for retirement, I don’t know what will.