The Tax-Free Savings Account (TFSA) is really a blessing for many Canadians, offering you plenty of benefits like tax-sheltered growth, withdrawals without incurring charges or taxes, and an overall flexible savings opportunity. In short, nothing can beat TFSAs when it comes to achieving your savings goals.
Making the most of it, however, is an entirely different matter. Canadians make a lot of mistakes when it comes to their TFSAs. I’ve even talked about a few crucial TFSA mistakes and how to avoid them. In this piece, I will discuss two useful tips that can help you get the maximum benefits from your TFSA:
Not recognizing the impact of market losses
The first tip is to acknowledge the effects of market gains and losses on your contribution room. How the overall value of your TFSA changes can have a significant effect on the amount you contribute to your TFSA in the future.
If your TFSA outperforms, the value of your original contribution can increase. The increase in value will allow you to withdraw and re-contribute a higher amount, and the market gains will increase your contribution.
Unfortunately, any market losses have the opposite effect. A drop in value will decrease the amount you can withdraw. As you can’t contribute more than you withdraw, that part of your contribution room is lost forever.
For instance, if you contributed $5,000 to your TFSA and the investment value dropped to $4,000, withdrawing the remaining $4,000 will leave you eligible to re-contribute just the $4,000 and not the $5,000 you initially contributed.
Being too conservative
The second pro tip to make the most of your TFSA is to avoid another critical pitfall: being too conservative. It’s essential to select reliable stocks in your TFSA with more conservative tendencies.
This doesn’t mean that you should go for investment opportunities that are too conservative, however, as they won’t be able to beat inflation over time. You need your TFSA to grow at a steady pace so your wealth can keep up with inflation.
Rather than being super conservative, you should consider investing in stocks like Toronto Dominion Bank (TSX:TD)(NYSE:TD). Banking stocks are known for many things, and none of them hint at high risks.
TD stocks are a safe option for you to consider. At the same time, they are not the most conservative option in the banking sector.
TD is the fastest-growing bank among Canada’s top financial institutions. Its rapid growth in retail banking operations south of the border is helping TD reach the kind of growth that its peers can’t compete with. Share prices for TD are up 5.40% year over year and it sports a healthy dividend yield of 3.91%.
Trading for $75.72 at the time of this writing, TD has gained almost 40% in the past five years. From the company’s capital gains to reliable dividend payouts, TD presents a pretty picture for investors. Avoiding the two pitfalls and investing in stocks like Toronto Dominion can help you take full advantage of your TFSA.
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Fool contributor Adam Othman has no position in any of the stocks mentioned.