Many Canadians have a TFSA, but unfortunately, not all of them use it wisely. If you don’t pay attention, you can make mistakes without even realizing it. I’m sharing with you three massive mistakes that Canadians are making in their TFSAs, so you can avoid them and maximize your TFSA’s potential.
Using your TFSA as a savings account
Many Canadians think that a TFSA is a savings account because its name is misleading (tax-free savings account). While you can use a TFSA as a savings account, you should not. Interest rates are currently around 1%, which is lower than inflation.
Some banks are trying to attract clients with promotional rates near 3%, but you’ll have this rate only for a few months. Even then, you can make much more by investing in the stock market.
You can open a self-directed TFSA with a discount broker to trade a wide range of investments, ranging from stocks, ETFs, mutual funds, options, and bonds. To profit the most from your TFSA, you should use it as an investment account, just like an RRSP.
By buying solid stocks and leaving them in your TFSA for many years, you will find yourself with a considerable amount of money that you will be able to withdraw without paying any taxes.
Taking too much risk
Rather than being conservative with their TFSA, some investors are tempted to go to the other extreme and take very high risks with their TFSA to make as much money as possible. This is not a good idea, because while very risky stocks offer the potential for very high returns, you could also end up losing a lot of money.
You might think that you have found a stock that will skyrocket in the next few months and be tempted to put all your money in it, but don’t do that. The stock market is uncertain, and you can never be sure what a particular stock will do. You should always diversify by buying many different stocks in different sectors.
CannTrust is a good illustration of this. This pot stock reached a peak of $13.90 in October 2018. At that moment, many analysts were saying that the stock was undervalued and that is was a good buy. The stock went down to $6.09 at the end of December and climbed to $12.91 in March.
Things started going really bad for CannTrust after this. The share price went downhill and is now worth less than $2. A scandal involving black market operations prompted massive sales of the stock. An investor who had bought CannTrust at its peak has lost almost 90% of their investment.
When something like that happens with a stock, you don’t want to have a lot of money invested in it. Besides, you cannot claim a tax loss in a TFSA.
Trading too much
Because you can trade stocks, options, and ETFs in a TFSA, you might think that you can trade as often as you want without any consequences. It would be great if you could do day trading in your TFSA and never pay any taxes.
But a TFSA is not designed for day trading. The government is watching, and if it notices that you are making hundreds of trades a year, it will consider the money you are making as enterprise revenue and you’ll have to pay taxes on it.
You should rather invest in your TFSA for the long-term, by buying and holding quality stocks like bank stocks.
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 Stephanie Bedard-Chateauneuf has no position in any of the stocks mentioned.