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self-directed investing

TFSAs can be ‘choose-your-own-adventure’ accounts because they offer a tax-sheltered chance for younger people to save for both immediate goals and can later be a more aggressive retirement account.PamelaJoeMcFarlane/Getty Images/iStockphoto

Dave Nugent has had an idea rolling around his head for a while. Tax-free savings accounts, he thinks, might better be branded with a new name: tax-free investment accounts.

"Too many people leave it sitting in cash," says Mr. Nugent, the chief investment officer of Wealthsimple, the Toronto-based, passive, online only robo-adviser with a large millennial client base. He speaks to a lot of younger investors, especially those looking to save for big life events such as a wedding or a first home.

And unless those folks are just a couple of years away from the purchase, "you need to get invested, and grow your money above inflation."

For millennials within their first decade in the work force, as soon as you start making enough money to save, it can seem like you already have occasion to spend it. But, depending on how far away your goals are, there are strategic ways to allocate assets in different accounts for different purposes.

"The greatest advantage a millennial has is they typically have time on their side," says Mr. Nugent, who knows the demographic well. He's 31. He often hears from younger clients wary of stock market tumult, especially for mid-term goals of five or 10 years. "That's actually a reasonable amount of time to invest."

Hence his criticism of the TFSA's name. Even if your biggest financial goals are planned for the next couple of years, saving for multiple goals is prudent – as far away as it is, there's always retirement – and it means investing wisely.

In terms of asset mix, he recommends the traditional march to safety. With a five- or 10-year horizon before a financial goal, Mr. Nugent suggests going aggressive on equities – up to three-quarters of the portfolio – and then gradually raising the fixed-income or cash-equivalent component until the three-year mark, when everything should be in cash or cash equivalents.

Shannon Lee Simmons, a certified financial planner with the fee-only New School of Finance advisory in Toronto, also recommends diminishing risk in the race to the finish line. "Cash-like products ... are super boring, but having exposure to volatility might not be a good idea," says Ms. Simmons, whose roster of clients is mostly between 25 and 45.

Meanwhile, the accounts your assets should sit in – TFSAs and registered retirement savings plans – depend on your individual financial situation.

If home ownership is on your mind, RRSPs have the built-in advantage of the First-Time Home Buyers' Tax Credit – an up-to-$25,000 saving grace for many – but it's effectively a loan, and those who use it need to repay it over 15 years. For some, that can add an undue amount of pressure on mortgage payments.

"You shouldn't stretch to buy a house," Mr. Nugent says. Building savings through a TFSA can be a wise alternative, then, since "you don't have the burden of having to recontribute each year."

TFSAs are "choose-your-own-adventure" accounts, Ms. Simmons says, since they offer a tax-sheltered chance for younger millennials to save for both immediate goals – with a conservative asset mix – and can be a more aggressive retirement account once life's big expenditures are out of the way. "For me, it's basically matching a TFSA asset mix to your goals," she says.

For some goals, such as a wedding, a TFSA's liquidity makes it a no-brainer, Ms. Simmons says. For home ownership, things can get trickier.

"If you put money into your RRSP, yes, you can get a refund today, but you're basically deferring tax to the future," Mr. Nugent says. If you need to withdraw it, though – particularly if you haven't retired but find yourself in a higher tax bracket than when you made contributions to the RRSP – the benefits disappear.

If that's the case, Mr. Nugent says, "you're better off contributing to a TFSA."

Within an RRSP, Ms. Simmons points out, there's no reason why you can't save for multiple goals, with your money allocated differently for each. The first $25,000, in cash equivalents and ready to withdraw soon for a home purchase, "might be a totally separate beast than the rest of the RRSP."

"If you drop $40,000 in there," she continues, "even if you're going to buy a house, that $15,000 on top of the 25 can be invested in a growth-oriented asset mix. Go long – you're not going to touch it for 30 years."

There are serious drawbacks, though, to playing chicken with the stock market with anything in your RRSP or TFSA earmarked for a home downpayment. Gaining an extra 10 per cent on your downpayment might mean slightly decreased mortgage payments, but it likely won't affect the house you buy, Mr. Nugent says. But the opposite?

"If you were to lose 10 per cent of your downpayment," Mr. Nugent says, "that affects the type of house you buy, that could defer your purchase to later years, or now you have a high-ratio mortgage to pay [Canadian Mortgage and Housing Corporation] insurance on."

TD Wealth financial planner Shelley Smith warns that the threat of losing 10 per cent of a downpayment might seem small, and suggests to consider what it would actually cost. "If you put it in dollar terms for someone who has saved up $20,000 or $30,000, what if it's worth $3,000 or $4,000 less? How do you feel about that?"

Even after jumping big hurdles for things such as a home downpayment, Ms. Smith advises having a wide-ranging portfolio to weather different market conditions and to have some liquid assets in case of emergency. "The diversified portfolio will allow you access to investments that perform differently at different times," she says.

Rob Carrick discusses the new fees that you will be seeing on your investment statements and whether you are getting good value from your invesmtent adviser

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