Investors: Are You Making These 3 TFSA Mistakes?

To maximize your TFSA, load up on Canadian stocks such as Telus Corporation (TSX:T)(NYSE:TU) while avoiding American companies such as General Motors Company (NYSE:GM).

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Tax-Free Savings Accounts (TFSAs) are the best thing to happen to Canadian savers since the days of GICs paying 15% a year.

The ability to invest $5,000 per year in a truly tax sheltered account is incredibly powerful. An investor who starts today with just $5,000 and tops up their TFSA every year for 30 years would end up with $662,042, assuming an 8% return.

Combine that with retirement programs such as CPP or OAS and smart decisions during an investor’s working years, and we’re most of the way towards a middle-class retirement.

There’s just one problem. TFSAs come with a bunch of rules. Most are pretty simple, but some are complex enough that they even trip up financial pros.

Here are three common TFSA mistakes. Avoid them and you will become richer.

Don’t over-contribute

The TFSA has been in place since 2009. Assuming you turned 18 on or before that year, here’s how much you can contribute:

Year Limit
2009 $5,000
2010 $5,000
2011 $5,000
2012 $5,000
2013 $5,500
2014 $5,500
2015 $10,000
2016 $5,500
2017 $5,500
Total $52,000

If an investor has missed contribution room over the years, they can top up their account, but only up to the $52,000 maximum. Also, keep in mind if you’ve maxed out your TFSA, you can’t withdraw cash and then put it back in the same year. You’ll have to wait until January 1 of the next year or face a penalty for over-contributions.

Fees for over-contributions can be harsh. They start at 1% per month on the highest excess TFSA amount. Some people have had success getting fees waived after convincing the government it was an accident, but do you really want to take that chance?

TFSA as a savings account

The stats are in, and they’re alarming. Too many folks — especially millennials–have their TFSAs sitting in cash or near-cash investments. You’re never going to get rich earning 1.5% from a so-called “high interest” savings account.

Part of this is because of bank marketing. Industry insiders know millennials are good savers who don’t want to lose the money they’ve diligently saved. Who can blame them? The stock market is a scary place.

But it doesn’t have to be. Investors can use ETFs to gain instant diversification at a low price. Or they can focus on stable stocks that aren’t subject to the same kinds of gyrations as the rest of the market.

Take Telus Corporation (TSX:T)(NYSE:TU) as an example. The company has an easy-to-understand business, a solid dividend yield of 4.4%, and, perhaps most importantly, it has a beta of 0.47. That means it’s less than half as volatile as the stock market as a whole. It’s the perfect stock for somebody who’s nervous about losing all their money in the market.

Avoid U.S. dividend stocks

Canadian dividend stocks are great choices for a TFSA, even if the experts say bonds and other interest-bearing securities are better. Total return matters more than tax savings.

One asset class to never put in your TFSA is U.S. dividend-paying stocks. TFSA holders have to pay a 15% withholding tax on those dividends, which immediately impacts their income. The same thing affects investors who hold U.S. dividend payers in a non-registered account, but those investors will get a corresponding tax credit to make up for it.

So if you’re looking to buy General Motors Company (NYSE:GM) shares because of the 4.3% yield, it’s rock-bottom valuation, or its future in self-driving cars, do so in your RRSP, not your TFSA.

The bottom line

As long as investors follow the rules, TFSAs can be an incredibly powerful way to build wealth. And nothing beats avoiding taxes. Use these tips to make sure you’re making your TFSA the best it can possibly be.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

More on Dividend Stocks

Happy couple being attended by office worker at office
Dividend Stocks

BCE Stock: A Great Pick to Boost Your RRSP Retirement Fund

BCE (TSX:BCE)(NYSE:BCE) stock is a dirt-cheap telecom stock with a huge dividend yield to keep RRSP investors happy.

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

Want Easy Passive Income? These 2 Canadian Dividend Aristocrats Deliver

Passive income stars like Slate Grocery REIT (TSX:SGR.U) should be on your watch list.

Read more »

stock research, analyze data
Dividend Stocks

RRSP Investors: 1 Cheap TSX Dividend Stock to Buy Now and Own for 35 Years

RRSP investors can still find top TSX dividend stocks to buy at discounted prices.

Read more »

Cogs turning against each other
Dividend Stocks

2 of the Safest Stocks (With Dividends) to Buy in Canada Now

Here are two of the safest stocks investors in Canada can buy now.

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

2 Top Canadian Value Stocks Worth Buying Right Now

Here's why Alimentation Couche-Tard (TSX:ATD) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) are two top value stocks to consider right now.

Read more »

Happy shoppers look at a cellphone.
Dividend Stocks

2 Bargain Stocks You Can Buy Today and Hold Forever

Here's why Fortis (TSX:FTS)(NYSE:FTS) and Manulife (TSX:MFC)(NYSE:MFC) are two bargain stocks I think are worth considering right now.

Read more »

Retirement plan
Dividend Stocks

Passive Income: How Canadian Couples Can Earn $747 Tax-Free per Month for Life

Canadian couples can take advantage of their TFSA contribution space to create a significant stream of tax-free passive income.

Read more »

Golden crown on a red velvet background
Dividend Stocks

3 Canadian Dividend Aristocrats to Buy for Passive Income Forever

Passive-income stocks like BCE (TSX:BCE)(NYSE:BCE) should be on your radar.

Read more »