3 Mistakes to Avoid in Your TFSA
The Motley Fool
Published Mar 21, 2019 08:09
Updated Mar 21, 2019 09:06
Since it was created 10 years ago, the TFSA has grown in popularity with Canadian investors. According to a study conducted by BMO, 69% of Canadians had a TFSA in 2018 — up from 56% in 2017.
To fully benefit from your TFSA, there are some mistakes you should avoid. While there are many, I present here three mistakes that you should especially avoid if you want to profit the most from your TFSA.
Exceeding the contribution limit Be careful not to exceed the contribution limit in your TFSA. Many people go over their TFSA contribution limit without knowing it, and it is very costly.
If you exceed the limit, the Canada Revenue Agency (CRA) will charge you a penalty of 1% per month for any amount that goes over your total TFSA limit ($63,500 in 2019) until you withdraw the funds in excess. You will eventually get a letter from the CRA to notice you, but it can take a few months.
It’s important to track your contributions carefully and to take note of any withdrawals from your TFSA. A TFSA is not like an ordinary bank account. If you withdraw money from you TFSA, the amount you withdraw will be added to your contribution limit, but only the year after you make the withdrawal.
Holding cash in your TFSA Although it is called a “tax-free savings account,” you shouldn’t hold cash in your TFSA. In a TFSA, you’ll never have to pay taxes on any money you put in it and on all the money you make from it. It is therefore not optimal to hold cash in a TFSA, since returns on cash are very low.
While its name can be misleading, you can hold any investments in a TFSA from cash, guaranteed investment certificates (GICs), bonds, stocks, ETFs, and mutual funds.
While you’ll make only about 1% a year in a daily savings account, you can get much more by investing your TFSA in stocks. There are many great stocks that will give you strong capital appreciation and that will also give you dividends which are entirely tax-free.
For instance, TD Bank (TSX:TD)(NYSE:TD) stock has risen by almost 13% since the beginning of the year. What is also great with a bank stock is that it pays high dividends, which are entirely tax-free in a TFSA.
TD will pay you a quarterly dividend of $0.74 per share, which gives a yield of 3.5% at the current price. So, with just the dividend, you get a much higher return than the interest you can earn in a savings account. TD is a very solid bank, so you don’t need to worry about your money. The dividend is very safe and increased regularly. Plus, the stock is a bargain.
Get The App
Your TFSA can grow to a big amount if you maximize your contributions and manage your portfolio properly.
Holding U.S. stocks that pay dividends in your TFSA A TFSA is not the ideal place to buy U.S. stocks that pay dividends. That is because you may have to pay a non-residents’ withholding tax of 15% on these dividends. You cannot claim a foreign tax credit for U.S. dividends on your Canadian tax return. In an RRSP, you won’t have to pay a withholding tax on your U.S. dividends.
So, if you want to buy a U.S. stock like Walmart (NYSE:WMT) (NYSE:WMT) , which pays a dividend of US$2.12 per share annually, it’s preferable to buy it in an RRSP, so you can keep the entire dividend. If you don’t have any more room in your RRSP, you should buy the stock in a non-registered account, so you can benefit from a foreign tax credit.
Fool contributor Stephanie Bedard-Chateauneuf owns shares of Walmart Inc.
The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Motley Fool Canada 2019
This Article Was First Published on The Motley Fool
Written By: The Motley Fool
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.