I was reading an article on TVA Nouvelles when a paragraph about TFSAs caught my attention:
«“Millennials are staying focused on their savings goals to meet their immediate needs. We believe the time has come to take a longer-term view by also saving for their future needs,”» said RBC financial planner Brigitte Felx.
This comment was in response to the finding that 48% of millennials prefer to invest money in their TFSA, while only 30% prefer to invest in their RRSP account. This is a subject I addressed in the book I co-authored with David Descôteaux d’Endetté à Millionnaire. However, our approach is quite different from that of Ms. Felx. We don’t believe that the TFSA should be used only for short-term savings. Unfortunately, some banks have been promoting this myth for far too long.
RISK-AVERSE TFSA? NO!
First, keep in mind that the same investment products can be used in both your RRSP and TFSA. So, yes, you can have a very low-risk savings account for your short-term needs, but you can also invest the funds in your TFSA in more aggressive investment products. You can, indeed, buy stocks or a portfolio of stocks with a TFSA.
THE RRSP – A TOOL TO OPTIMIZE YOUR TAXES
Another thing to keep in mind is that RRSP room can be deferred. Also, if you withdraw from your TFSA, you’ll have access to your contribution room again. So, the decision to invest in a TFSA is not an irreversible one, whereas the decision to invest in an RRSP is almost irreversible. The flexibility of the TFSA is exactly what millennials need. So, there’s a reason why they choose it.
Why would you invest in an RRSP if you’re making $40,000 a year and your career plan means you will end up being an overburdened taxpayer in a higher tax bracket? The RRSP gives you a tax break, but the discount is calculated by subtracting your last dollars earned from your taxable income. If your last dollar is taxed at 28% right now but will be taxed at over 45% in 2030, why take the RRSP today? Wait! Instead, invest the money aggressively (if you wish) in a tax-sheltered vehicle, and once you have reached the elite club of people who are swimming in money, empty your TFSA to contribute to the RRSP!
As you can see, the RRSP is a tax optimization tool to be used when your salary situation is at its peak. Previously, there was no TFSA, so the RRSP was the only tax shelter option available. But now, we have a choice. Young people have a choice. It is more than fitting for them to choose flexibility when they have not yet bought their first home or reached their full potential in business. It’s not because they think only about the short term that they prefer the TFSA. It’s also because, in many cases, the TFSA is the best solution for them right now!
As advisors, we should not focus solely on the client’s income last year. We must ask them about their future, their career.
DON’T FORGET ABOUT THE RESP EITHER
In many scenarios, the RESP is an even more powerful tool than the TFSA or RRSP. If a young adult without children saves money in a TFSA and accumulates a small nest egg, they can transfer it to an RESP once they become a parent and collect extra money through government subsidies. Imagine!
Once their children are pursuing post-secondary education, they could even transfer some of their RESP … into their RRSP!
So, at the end of the day, if you’re hesitating between the TFSA and the RRSP, keep in mind that you need to work with an advisor who understands your life plan. If in doubt, opt for a TFSA. You can transfer it to an RRSP later, once you have a better understanding of the three main financial tools available to working Canadians.
Ultimately, if you invest in a TFSA, it may be because of your long-term vision, contrary to what we would have you believe.