An income earner in Canada can look forward to a happy retirement by opening and maintaining a Tax-Free Savings Account (TFSA). But it’s important to learn the rules governing the TFSA, so you, as an educated investor, can maximize its efficiency.
First and foremost, you need to pick the right investments. A good start will lead to a great finish. Here are some tips and tricks you can follow to reap the fruits of your TFSA and enjoy a problem-free retirement.
Set a longer investment horizon
The most practical tip is to start investing early. Those who opened a TFSA in 2009 and built their stock portfolios have already accumulated a substantial amount. Your TFSA is saving for the long haul. The investment time frame should be at least 20 years.
Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), or Scotiabank, has been around since 1832. The $83.5 million banking institution is also among the Big Five banks in Canada. I am sure the stock is a core holding in the stock portfolios of many baby boomers.
A 36-year-old investor who’d invested $10,000 in Scotiabank in 1999 has realized a 915.84% total return, including the reinvestment of dividends. Today, at 56 years old, that investment is worth $101,531.16. From that return alone, you could call Scotiabank a prosperity stock.
With an annual dividend yield of 4.9%, a TFSA investor can create an income stream beyond a 20-year investment horizon. There is no worry about the instability of the investment. Scotiabank has survived several financial crises. The bank is even stronger today to endure economic meltdowns.
Overcontribution in a TFSA indicates a lack of understanding of the annual contribution limits or the prevailing contribution room total. Any amount over and above the limits is considered overcontribution. You will be penalized 1% every month for this mistake.
Fortis (TSX:FTS)(NYSE:FTS) is one of Canada’s formidable utility companies. If you can comply with the TFSA’s contribution limits, you can keep buying shares of this regulated electricity giant, which pays an annual dividend of 3.35%. The dividends are safe given the low payout ratio of 48.63%.
Because the business is highly regulated, Fortis has been generating stable cash flows through the years. Further, the company has increased its dividend payment for 44 consecutive years. Prospective investors can expect an annual dividend growth of 6% until 2023. Fortis made this promise recently.
Fortis can live to its commitment because of the diversified portfolio and growth opportunities in the territories it serves. If you can avoid the penalty tax due to overcontribution, you can derive higher returns from this income-producing stock.
Don’t make it a business
The Canadian Revenue Agency (CRA) is strict on TFSA investors who use the account for the buying and selling of stocks. The TFSA was not created for TFSA investors to make a killing on trading gains. If the CRA catches you engaging in trading activities, a case can be filed against you and all income will be taxable.
Best choices for the TFSA investors
If you have Scotiabank or Fortis in your TFSA, there’s no need to be greedy and chase trading gains. Over the long term, the stocks can deliver the income you need in the future. All you need to do is sit back and relax.
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Fool contributor Christopher Liew has no position in any of the stocks mentioned. Bank of Nova Scotia is a recommendation of Stock Advisor Canada.