Q&A: TFSAs for Zoomers

Question: I have just finished reading your book on Tax-Free Savings Accounts (TFSAs). Very informative and easy to understand. My question is: you gave examples of how couples can become millionaires. Great, but what does a 70-year-old widow do to achieve similar status? I did start a TFSA this year and have investments in mutual funds, GICs, etc. How do I position myself to get the best results? Thank you for paying attention to those of us who don’t want to leave ALL our money to the governments! – Gail M.

Gordon Pape answers: I wish I could promise you too could become a millionaire with your TFSA but unless you plan to live until about 110 I really can’t. It takes time, especially given the low annual contribution limit of $5,000.

However, you can use your plan to maximize your tax-exempt investment earnings for as long as you live. The best way to achieve that is to hold securities that you expect to generate the most taxable profit in your TFSA. These would normally be stocks or mutual funds, especially in this low interest rate environment.

Let’s say you have a choice between investing in a GIC that pays 2.5% and a stock that you expect to gain 10% over the next year. For every $1,000 invested in the GIC, you would shelter $25 annually in interest. The stock would generate a capital gain of $100 for every $1,000 invested. Half of that ($50) would be taxable outside a TFSA. So you double the tax-sheltering value of the plan by holding the stock in the TFSA. Of course, that involves more risk but your question was how to get the best results.


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