As the years pass, Canadians are using less of their available TFSA contribution room.
This is the takeaway from a recent Canada Revenue Agency report, which showed that the amount of unused TFSA contribution room rose 12% from 2016 to 2017–the most recent year for which statistics are available.
The report shows that Canadians are not maximizing the tax-free investment space they could be using. While this may not seem like a big mistake on the surface, it in fact limits the amount of tax-free growth Canadians are able to take advantage of.
As you’re about to see, it’s absolutely crucial that you max out your TFSA as soon as possible. To understand why that is, it helps to first know why not maxing out your TFSA is a mistake.
Why not using your contribution room is a mistake
Assuming you have a decent amount of disposable income and no pressing financial obligations (i.e., debt), leaving TFSA contribution room unused is a mistake, as it limits the total amount of tax-free growth you can enjoy over the years.
Although TFSA room never goes away, any year you put off maxing out your account is a year that you’re not enjoying all the tax-free growth you could be.
Historically, stocks tend to rise more often than they fall. Therefore, it’s optimal to get as much money in stocks as early as you can–ideally in a tax-free account like a TFSA.
Nobody can predict exactly when the next market downturn will occur. What you can reasonably predict is that any money you put into stocks in a given year will grow over time.
In a TFSA, that money will grow tax free. Therefore, it’s best to max out your TFSA and get it fully invested as soon as possible.
What to buy
Once you’ve committed to maxing out your TFSA, the next step is to figure out what to buy.
Fortunately, that’s not as hard as it looks.
While picking high-quality individual stocks is indeed a research-intensive process that takes a lot of time, you can shortcut the process by buying ETFs like the iShares S&P/TSX 60 Index Fund (TSX:XIU).
ETFs give you built-in diversification and a virtual guarantee of average market returns (minus a small fee).
These types of funds minimize the amount of research you have to do, and make the investing process much easier than it would otherwise be.
Why XIU in particular as opposed to the hundreds of other Canadian and foreign ETFs that exist?
First, as a Canadian ETF, XIU spares you having to worry about currency conversion costs or foreign exchange rate fluctuations.
Second, as a TSX 60 ETF, it’s heavily weighted in large caps, which are generally low risk compared to other equities.
Third, it has very low management fees, so you won’t see too much of your return being eaten up by unexpected costs.
Finally, it pays a dividend that yields about 2.8% at current prices–enough to generate just slightly less than $2,000 a year in income with $69,500 invested.
