Should you use a TFSA for retirement savings?

The short answer is: absolutely!

The TFSA – Tax-free Savings Account- has been around since 2008. Yet, it still remains a mystery for most folks.

Accordingly, most people don’t know how to use this account efficiently. I don’t blame you, if you fit into that category. This account is a bit of a misnomer.

It leads us to believe that all we can put in it is cash. It’s not the case. A TFSA can hold stocks, bonds, ETFs, REITs, mutual funds and even precious metals like gold and silver.

Now that we got this out of the way, let’s see how the TFSA can also be used for retirement savings. There are pros and cons of doing so.

Pros of using a TFSA for retirement savings

1. Pretty much tax-free: well, at least at the time of writing. This is the biggest advantage of this account. I say “pretty much” because there are some instances that you could pay taxes on it. I’ll elaborate in the cons. Capital gains, interests and dividends usually aren’t taxed. Same for withdrawals. In comparison, an RRSP is a tax-deferred account. You have to pay income tax the second you draw from it.
2. No time limit: you can keep your TFSA until the day you die. You have to close/convert your RRSP when you turn 71.
3. No claw-back: because TFSA withdrawals don’t count as income, they won’t trigger any claw-back on your government benefits such as OAS or GIS. It’s not the case with an RRSP/RRIF.
4. Total flexibility: You can withdraw as little or as much as you want, whenever you want to. There are annual minimum withdrawal amounts for RRIFs.

Cons of using a TFSA for retirement savings

1. No tax deduction: unlike an RRSP, contributions to a TFSA don’t lower your taxes.
2. Smaller contribution amounts: the limit for 2021 is $ 6 000.00. If you max out your TFSA every year, this amount may not be sufficient to build your retirement savings. The lifetime contribution limit is $ 75 500.00, at the time of writing.
3. No group TFSA’s: unlike RRSPs, your employer can’t contribute to your TFSA.
4. Tax on some foreign investments: although you can purchase, stocks, bonds etc…they all need to trade on the TSX. If you buy individual stocks on the NYSE, they’ll be taxed accordingly, as there is no tax treaties with other countries for foreign investments in TFSAs, unlike RRSPs.
5. No annuity conversion: you can’t convert your TFSA into an annuity, unlike an RRSP.

Final word

There are definitely advantages to using a TFSA for retirement savings. Depending on your personal situation, it may even be better for you to contribute to a TFSA over an RRSP.