5 Massive TFSA Mistakes to Avoid at All Costs!

Why the BMO Low Volatility Canadian Equity ETF (TSX:ZLB) is the perfect cure for nearly half of Canadians who aren’t using their TFSAs properly.

| More on:
IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT

Image source: Getty Images

According to a recent poll commissioned by Royal Bank of Canada, approximately 43% of Canadians are misinformed when it comes to Tax-Free Savings Accounts (TFSAs) and are not using the vehicle to grow one’s wealth optimally.

That’s a massive problem that needs to be addressed. The TFSA is an invaluable tool that could mean the difference between retiring very comfortably many years (or decades) in advance and being stuck in the workforce into one’s 60s or even one’s 70s.

Indeed, educating yourself on how to use a TFSA properly could be a life-changing decision. And if you’re one of the Canadians who’s been guilty of being “misinformed” or neglectful when it comes to the TFSA, you’ve come to the right place. This piece will review three of the biggest mistakes that one could make with their TFSAs.

Not contributing your maximum allowable amount

In 2019, you should have a cumulative sum of $63,500 that you’re able to contribute. Every year moving forward, you should expect to add an additional $6,000 annually. If you’ve contributed some amount in the past, but aren’t sure whether you’ve still got room to hit the maximum amount, you should check with the CRA to confirm how much you can add currently to avoid over contribution.

If you’re able but are not contributing the maximum allowable amount, you’re not getting the most of your TFSA, and could be leaving tens of thousands of dollars on the table over the course of your investing lifetime.

Over contributing

If you’re not keeping track of how much space you can contribute, you risk over contribution, and you’ll be subject to unnecessary penalties. It’s a can of worms you don’t want to open, so make sure you know how much you’re able to contribute before plunking down as much as you can into the account. You’ll thank yourself later.

Hoarding cash in TFSA “high” interest savings accounts

This is probably the most common mistake that TFSA investors have been making. Sure, your bank may offer you “high” interest savings accounts within your TFSA, but news flash: the interest rates are nominal, and you’d be lucky to pull ahead of the rate of inflation over the long term.

In essence, the word “high interest” on such savings accounts is very misleading to misinformed Canadians. Sure, you’ll get a higher rate than in a non-registered account, but you still won’t grow your wealth or purchasing power in the grander scheme of things.

Being overly conservative with low-return investments

If you haven’t fallen into the “high” interest savings account trap, you may be like many of the excessively risk-averse Canadians who’ve opted to hoard “risk-free” instruments like GICs, bonds, and all the sort.

These products are not much better than cash. In fact, long-term bonds and GICs may actually be inferior to cash due to their lower liquidity.

While it’s fine to have a chunk of your wealth in such “risk-free” securities, it’s a mistake to have it account for a majority of your TFSA, especially if you’re a young investor who’s not even thinking about retirement yet.

If you are a risk-averse investor by nature, look to low-volatility plays like the BMO Low Volatility Canadian Equity ETF (TSX:ZLB) instead — it’s a feast of significant gains made possible by equities with a little less indigestion from the stock market roller coaster ride that’s been made more stomach-churning by President Trump.

Holding high-yield U.S. (foreign) dividend stocks

Finally, holding U.S. dividend stocks within a TFSA is a tricky mistake — one that many of may be guilty of. As you may be aware, U.S. (and foreign) dividends are subject to a withholding tax. The Canada-U.S. Income Tax Treaty allows Canadians to claim up to 15% of U.S. taxes paid on dividends.

With a TFSA however, you lose your power to claim such a credit and the portion of your U.S. dividend vanishes in a poof of smoke. Thus, the TFSA ought to be a no-fly zone for all your favourite dividend-paying U.S. (or foreign) stocks.

Instead of U.S. (or foreign) dividend stocks, look to domestic dividend payers, or ETFs like the ZLB, which has some of the finest free-cash-flow-generative dividend-growth plays on the TSX Index. The 2.4% yield is yours for the keeping!

Stay hungry. Stay Foolish.

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 Joey Frenette owns shares of BMO Low Volatility CAD Equity ETF.

More on Stocks for Beginners

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

edit Sale sign, value, discount
Stocks for Beginners

These 3 Growth Stocks Are on Sale and Set to Surge

Some growth stocks are on sale right now that offer massive long-term potential for investors. Here's a trio to consider…

Read more »

Plane on runway, aircraft
Stocks for Beginners

Up 53% From its 52-Week Low, Is Cargojet Stock Still a Buy?

Cargojet (TSX:CJT) stock is up a whopping 53%, nearing closer to 52-week highs from 52-week lows, so what's next for…

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »