Cash Club: Tax-free retirement fund

In Cash Club, Latestby Njabulo Nsibande

I’ve been following Just One Lap for the past three years. One of the most important lessons I’ve learned is that you should try and max out your tax-free savings account (TFSA) first. I always pass this bit of advice on to friends, family and anyone who cares to listen. Even before explaining what can or cannot be bought in a TFSA, I always clarify that the real benefit of a TFSA lies in time, as opposed to the choice of assets one can buy.

People I‘ve been interacting with—especially those who are at the early stages of building their wealth—often seem to think that TFSAs are vehicles to evade tax in the short term or they think of it as another savings account. This is because most of them opened their TFSA with their banks, and they’re saving their cash as they would have with a normal savings account. Maybe this misinterpretation is due to the name: tax-free savings account.

I consider my TFSA as a retirement fund. That’s why I call it the tax-free retirement fund. I treat it the same way as I would an RA if I had one (I’m still trying to max out my TFSA allowance). I think the main difference between an RA and TFSA is largely the control one has. With a TFSA I have 100% control in how I invest and how I withdraw. With an RA there are rules, terms and conditions, such as regulation 28 compliance. You can also only cash out when you turn 55 and then you’ll only have access to a third of your investment in cash. As much as the tax rebate is attractive to an investor, the layers of fees in an RA and living annuity puts me off – plus paying tax is delayed and not really avoided.

If an RA fund performs the exact same way as a TFSA portfolio, the TFSA would win, purely on fees and the tax saved and reinvested. All I need to do is to give my tax-free retirement fund time and I should be doing just fine.

Stealthy Wealth wrote a very interesting piece called A retirement plan, no financial advisor will tell you. It details how one can comfortably retire just on a TFSA, by purely just maxing it out and let time do the magic.

Maybe the financial industry should market TFSAs as discretionary retirement funds, because that’s exactly what they are. Or we should just treat them as such – at least that’s how I look at it.

I’m not saying RAs and provident funds aren’t important, I am just saying that tax-free accounts should be viewed with the same long-term view.

Njabulo Kelvin NsibandeNjabulo Nsibande is a Just One Lap user-turned-contributor. His “Cash Club” blog details his experiences balancing the financial obligations of a young parent with his investment aspirations.

Njabulo is a founding member of an investment club. In this blog he shares his experiences trying to work out the intricacies of collective investment in the true sense of the word.

Follow Njabulo’s journey here every month.

Find him on Twitter: @njab_soul.

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