Help your clients invest their TFSAs

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Help your clients invest their TFSAs

After 10 years, more Canadians than ever are tapping into the power of the Tax-Free Savings Account (TFSA). Yet many people use their TFSA to hold cash or basic interest-bearing accounts. Some might be confused by the name and don’t realize their TFSAs can hold investments. For others, it may be a case of the “park it and forget it” syndrome that afflicts too many RRSP accounts.

Regardless of the reason, this is a lost opportunity to build tax-free wealth. Here are some suggestions for how to encourage your clients to use all their TFSA to its full potential.

1. Remind them of the amounts
This year’s contribution limit is $6,000. Any unused contribution room can be carried forward to future years. Since the TFSA was introduced, the total contribution room available to every adult, regardless of income, is $63,500. Even though the average Canadian holds less than half that amount, it’s an awful lot to be idling in cash.

2. Inform them how they can invest
Make sure your clients realize the full spectrum of holdings a TFSA can contain. In addition to high interest savings accounts and GICs, that includes individual stocks, bonds, mutual funds and ETFs. Holding these within a TFSA and avoiding paying tax on the compounding returns can make a huge difference over time.

Provide a personalized illustration that will help your client visualize how significant this can be. A chart comparing a savings account and an ETF inside a TFSA, for example, tailored to the client’s level of savings and time horizon, can be very persuasive.

3. Show them the benefits of compounded returns
While most people do understand that their money grows tax-free within a TFSA, they might forget about the incredible power of compounding over the long term — a power that becomes more dramatic as the returns nudge higher.

4. Help them structure a TFSA portfolio
Some clients deliberately hold cash in their TFSA as a rainy-day fund. While it’s always great when clients plan ahead, there’s no reason they have to take an all or nothing approach.

Help them create a TFSA portfolio, where a portion (say, two- or three-months’ living expenses) is held in a money market or a high interest savings account, and the rest is placed in higher-yielding investments. Their ongoing contributions would be added to the invested portion.

Start the dialogue
Since a large proportion of Canadians with TFSAs are not using them to their full advantage, it’s a good idea to talk to your clients about how you can help them achieve the full wealth-building potential of this powerful saving tool.