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Josh Olfert expects his TFSA to generate 20 per cent of his retirement income.John Woods/The Globe and Mail

Kevin Stone is one of many Canadians waiting to see what changes the new federal government will make to tax-free savings accounts (TFSA).

Earning $50,000 a year, the Vancouver graphic designer doesn't quite fit the demographic of the "wealthiest Canadians" that some say benefit most from the increased $10,000 limit, which the Liberal government is expected to roll back.

Still, the 28-year-old, author of the Freedom 35 investing blog, saves as much as possible, including maximizing his TFSA with the goal of retiring in seven years.

"Ever since I started working, I've put away 15 per cent of my paycheque and I increased that whenever I've had raises," he says, adding he now saves about one-third of his income.

For him, the TFSA's potential is enormous. Invested for growth, maximum contributions over 30 years could grow to more than $1-million, he says.

He expects his TFSA will generate about 20 per cent of his retirement income. "But I guess that depends on what the new government has in store."

Since being introduced in 2009, the TFSA is increasingly on Canadians' radar as a means of saving for their golden years. In fact, Statistics Canada's latest data reveal it is favoured by Canadians over the registered retirement savings plan (RRSP). In 2013, about 6.7 million Canadians contributed to a TFSA.

That number was more than the six million who contributed to an RRSP.

Much of its attraction is flexibility. Money can be withdrawn at any time, tax-free, unlike withdrawals from an RRSP, which are taxable.

Yet when planning for retirement, the TFSA and RRSP are best used as complementary tools, says certified financial planner Doug Nelson, author of Master Your Retirement.

"The RRSP has two major advantages as a long-term wealth-building tool," the Winnipeg-based adviser says. First, RRSP contributions are tax deductible, which creates a tax refund that can be reinvested in either account. Second, for most earners, there's more contribution room in an RRSP than a TFSA.

TFSAs can be advantageous in certain situations. Instead of generating a tax bill by withdrawing from RRSPs for housing repairs, for example, retirees can use their TFSA.

Also, TFSA contributions are typically more beneficial for low-income individuals.

"When income levels are lower, like during your 20s when you are just starting out, maximizing the TFSA may be the better option," Mr. Nelson says, because it lets young investors build up their RRSP contribution room for higher tax savings when they're earning more.

Mr. Stone agrees: "Later on you will have time to catch up on RRSPs, using contributions to more advantage in a higher tax bracket."

In his eyes, the TFSA's big benefit is its tax-free status. "Once retired – regardless of age – and you start taking money out, it provides a lot of benefits as non-taxable income."

For example, income and withdrawals have no bearing on income-tested programs such as Old Age Security and the Guaranteed Income Supplement.

Still, the TFSA could soon lose some of its lustre. The new Liberal government is expected to make good on its election promise to roll back the annual contribution limit to $5,500, reversing the former Conservative government's recent increase to $10,000.

The reversal is in part a recognition that the higher limit mostly benefits wealthier Canadians, says certified financial planner Daryl Diamond, author of Your Retirement Income Blueprint.

"The increase in contribution room in the 2015 federal budget was criticized by some as a windfall to the rich, and certainly one does need to have the means to fund these accounts," he says. "But there is both merit and benefit for those at lower income levels to be using TFSA accounts as a vehicle for accumulating capital for their retirement, so rolling back the limit, while symbolic, strikes me as a counterproductive measure for many Canadians who are not rich."

Professor Rhys Kesselman at Simon Fraser University's School of Public Policy in Vancouver says TFSA maximizers "have been disproportionately concentrated at upper incomes, particularly individuals with incomes over $150,000, along with some seniors at more moderate incomes."

For these individuals, TFSAs are not increasing the rate of saving – the original intention behind their creation, he says. Instead, they are transferring taxable assets to their TFSA, driven by "pure tax avoidance – no new net saving."

While figures for Canadians making the maximum contribution for 2015 are not yet known, if maximization rates for 2013 – at the $5,500 limit – are any indication, Mr. Kesselman estimates less than one in 20 eligible Canadians would contribute $10,000.

Josh Olfert is off to a good start with his TFSA, contributing as much as is allowed since he became eligible to open the tax-sheltered account at the age of 18.

The 20-year-old Winnipegger, who earns about $42,000 annually, has worked 70-hour weeks at two jobs over the past two years to help maximize contributions to his TFSA. He says it is his primary savings vehicle for retirement.

"For someone trying a DIY approach to saving for retirement and starting out early, the TFSA is the best option," says Mr. Olfert, who recently became an investment adviser. "I absolutely plan on becoming a tax-free millionaire and the TFSA allows that to happen."


Fact box:

The power of tax-free growth: The TFSA over the long term will amount to a substantial increase in returns on capital compared with a taxable account. Below is a comparison of contributing the annual maximum of $5,500 over 40 years at–a very optimistic–10 per cent annualized rate of return between a TFSA and a taxable account. (Taxation is based on interest income for an individual earning $58,000 gross annually.)

Total TFSA balance: $2,677,685

Total taxable account balance: $1,035,579

–Data provided by the Knowledge Bureau

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