5 reasons why TFSAs aren't always the best fit for everyone

financialpost.com:

By Jason Heath

Tax-free savings accounts (TFSAs) are a great choice for the right people at the right time in their lives. For others, they may not be the best fit. I am a certified financial planner with a TFSA, so I am in favour of them — sometimes. So, what is the right time for a TFSA? And how do you know when to cash it out?

If the answer is yes and you have a TFSA, you need to consider the type of debt you have and the type of TFSA investments you own. If you have high interest rate debt, such as a credit card or an unsecured line of credit, you might want to cash in your TFSA to pay down your debt. Your interest rate is probably double digits and you could be paying 20 per cent or more for credit card debt.

You would need to expect a higher return for your TFSA than the interest rate on your debt to be better off in the long run. The S&P 500 has had a total return of 30 per cent over the past year and 15 per cent annualized over the past 10 years. These returns are way beyond the expected returns for Canadian domestic and foreign developed market equities that are in the 6.5 to seven per cent range based on FP Canada’s guidelines, which are influenced by pension plan estimates. On that basis, a high-rate borrower with a TFSA might consider themselves lucky and reconsider their TFSA strategy.

If you have a secured line of credit, your interest rate is probably in the 7.45 to 7.95 per cent range right now. Despite the strong short- and medium-term historical returns for the S&P 500, most investors have a mix of stocks and bonds — meaning lower expected returns — and pay one to two per cent fees to own their investments. So, an expected seven to eight per cent future return may be tough for some people to achieve.

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