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Except for one serious problem, tax-free savings accounts are an excellent way to save for retirement.

Your money compounds tax-free in a TFSA, and you can withdraw it tax-free in retirement or whenever. That’s an advantage over registered retirement savings plans, where you get a tax break on contributions and then pay tax on withdrawal. From my experience, retirees are really bugged by the taxes they pay on RRSP withdrawals, while they love withdrawing tax-free TFSA money.

So what’s the problem with TFSAs as a retirement savings vehicle? In a word, it’s accessibility. Money can be transferred out of a TFSA and into a chequing account with just a few taps of your finger on a mobile device, or a few mouse clicks on a computer. It’s too easy to divert TFSA money away from a distant retirement and into a purchase in the here and now.

This brings me to a question from a reader: "How can I maximize the use of a TFSA when saving for retirement? Or, is an RRSP just the way to go when saving for retirement?”

Here’s how to maximize TFSAs for retirement:

  1. Max out your contributions: The limit for 2019 is $6,000 for people 18 and older, and the cumulative room since TFSAs were introduced back in 2009 is $63,500.
  2. Label, sequester, quarantine or otherwise isolate and demarcate your TFSA so it’s clearly for retirement and not your next vacation or kitchen reno: A practical suggestion for retirement TFSAs is to get into the habit of ignoring them and not checking your balance online all the time. Find a good investment mix and, other than periodic rebalancing, let it run.
  3. Invest your retirement TFSA in a mix of stocks and bonds that corresponds with your age and investing goals: You’re not maximizing a TFSA for retirement if you keep it in a savings account or use guaranteed investment certificates. A default asset mix for people a decade away or more from retirement could be 60 per cent stocks, 40 per cent bonds.
  4. Use RRSPs as well: A lot of people won’t end up with sufficient retirement savings if they limit themselves to TFSAs only.

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