Q&A: TFSA investing

Question: I invested our TFSAs at Ally.ca at 3.6% over five years. We can cash it out any time at a lower rate. So if rates go up soon we get the higher rate. Is this a safe idea for the TFSA? In 2009, we got 4.25% compounded in a five-year GIC. Sure like the safety! – Calvin B.

Gordon Pape answers: The fact the new GIC is cashable is certainly a big plus. Rates are almost certain to rise later this year and into 2011. You’ll want the flexibility to move to a security with a higher return when that happens.

My concern about holding non-redeemable GICs in a TFSA is that you lose the flexibility of being able to withdraw money at any time, tax-free, if it is needed. Also, when rates are so low your tax-free profits are minimal. A return of 3.6% on $5,000 is only $180 a year. If your marginal rate is 40%, you are only saving $72 in taxes. Unless the TFSA is being used strictly as an emergency fund, I suggest taking a little more risk and aiming for higher returns.