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Everything You Need to Know About Starting a TFSA

The first time I visited the Motley Fool Canada, I certainly wasn’t on the lookout for the next big stock, or even which stocks to buy for the long term.

I was here for the basics. It’s part of the reason I’ve loved reading (and writing) for the Motley Fool for so long. It offers investors a way to both expand their knowledge of investing and just an overview of how to get started.

So today, I’m speaking to investors who are here wondering where to even begin. The best place? Opening up a Tax-Free Savings Account (TFSA).

When this program was announced a decade ago in 2009, the government of Canada allowed investors to put $5,000 toward investing in Canadian companies, tax free. Since then, the program has expanded to where today investors can put $63,500 away.

But before I get ahead of myself, let’s answer some of those basic questions you might have as an investor as to why the Canadian government launched this program in the first place.

What is it?

The TFSA is a way for Canadians to put money aside, tax-free, for their entire lives – unlike the Registered Retirement Savings Plan (RRSP).

No sell-by date, no taxes, just put it away and watch it grow. All investors need is to be 18 years old or older with a valid Social Insurance Number.

As you contribute to your TFSA, there are no taxes deducted. You can choose to use the TFSA as simply a savings account, or you can manage it yourself by buying and selling different types of investments.

So… no taxes?

Well, not exactly. Let me be clear: if you are buying and selling Canadian companies, and staying within the rules, you will not be taxed. But here’s where you might incur taxes in your TFSA.

  • Contributing beyond the allowed contribution room. This can happen if you put in money, take out money, and then put money back in that goes beyond the total contribution room.
  • For example, putting in $50,000, taking out $30,000, and then putting in another $40,000. While your TFSA says you have $60,000 invested, you have actually contributed $90,000 for the year, far beyond the $63,500 of allowed contribution room for 2019.
  • Including prohibited investments in your TFSA
  • If you aren’t a resident of Canada
  • If you were given an advantage when contributing to your TFSA
  • If you contribute to foreign investments, especially those with dividends as you could get a withholding tax.

Other rules

One thing some investors wonder about is whether they can short sell using a TFSA. The short answer: no.

If you start trading on a regular basis, this could turn your TFSA into a business account. That means your TFSA will suddenly be taxed as a business, and you will have to pay income tax.

As the TFSA is now a decade old, many investors have been moving towards a TFSA over an RRSP, making some wonder what would happen if they died with the TFSA still active.

Simply put, investors would provide a beneficiary of the TFSA, such as a survivor (spouse or partner), or a designate (a child, or someone named to be the benefit holder).

So where do I start?

Set up a meeting with your bank, where they will fill you in on more details of the TFSA, and help you come up with a goal.

Every investment portfolio should have a goal in mind, whether it’s paying off student loans or saving for retirement. That will help gauge where you want to start investing.

Before your meeting, it’s totally fine to start doing your own research into where you might want to invest. Ideally, you want strong options with a history of solid performance, future outlook, and dividend increases.

For my money, I would look into Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Inter Pipeline Ltd. (TSX:IPL). TD offers you exposure to the Canadian banking industry, and the company is going through massive growth at the moment through its United States expansion and entering the wealth and commercial management sectors.

Inter Pipeline, similarly, is also going through growth by expanding its pipelines and opening a petrochemical complex. Both stocks also offer amazing dividends, cash that comes in every quarter that can be taken out, or reinvested into your TFSA.

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Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned.

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