Why Tax Free Savings Accounts are a Bad Idea: Part 2

We have discussed why Tax Free Savings Accounts are a good idea:

  1. you can save taxes;
  2. it’s harder to get at your money, so you are more likely to not be tempted to dip into your savings; and
  3. future income from your TFSA will not impact your eligibility to receive some government programs.

We also discussed why a TFSA may be a bad idea: if you over-contribute, or use it for short term savings, you could get hit with an unexpected tax bill.

Here’s the final reason why a TFSA may be a bad idea for you: there is no point in creating a big savings plan if you still have debt.  If you carry a balance on a credit card and you are paying 18% interest on your balance, it makes no sense to invest your money in a TFSA that may be paying 2%.  Yes, you are earning the 2% tax free, but you are paying 18% after tax on your credit card; that’s a bad idea.

If you have debt, pay off your debt first, then consider a TFSA.  Research your debt management options and pay down your debt, then start a TFSA in the future.

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