TFSA Users: 2 Investing Decisions You’re Bound to Regret

If you have a TFSA it’s good to hold index funds like the iShares S&P/TSX 60 Index Fund (TSX:XIU)

| More on:
Double exposure of a businessman and stairs - Business Success Concept

Image source: Getty Images

The Tax-Free Savings Account (TFSA) is the best tax-saving account Canadians have at their disposal. Offering the ability to grow assets and withdraw the proceeds tax-free, it’s far more flexible than an RRSP or any other registered account.

Although TFSA contribution space is fairly limited ($6,000 was added in 2020 for a $69,500 total), the account has enough room for investors to build up a sizable sum with wise investments.

It only takes around seven years to double your money at 10% a year. In a few decades, a small TFSA could grow to a truly impressive size.

At least, that’s true if you make the right investing decisions. Because in order to benefit from your TFSA, you nTFSA Users: 2 Investing Decisions you’re Bound to Regreed to realize a gain.

If you lose money in the account, a TFSA is actually a losing proposition, as TFSA losses can’t be used to offset capital gains taxes.

For most investors, opening a TFSA is a good idea most of the time. However, there are a few deadly TFSA mistakes you need to avoid committing at all costs. The following are two of the most serious.

Making overly risky plays in your TFSA

In a certain sense, TFSAs are ideal for risky investments, as their contribution space is low and they let you withdraw all your funds immediately. These features make TFSAs perfect for short-term speculative plays.

However, extremely risky, all-or-nothing plays, such as certain types of derivatives should be avoided in your TFSA. As previously mentioned, TFSA losses can’t be used to offset capital gains.

As a result, a big loss in a TFSA is a bigger loss than it would be in an ordinary brokerage account. For this reason, it’s wise to keep your risk levels in a TFSA to a moderate level.

Holding cash in your TFSA

Another big TFSA mistake is holding cash. You need to realize some type of gain in order to realize a tax benefit from your TFSA. While many TFSA cash accounts pay interest, it’s usually pretty negligible.

In order to truly realize the benefits of your TFSA, you’ll want to hold investments with some dividend and/or capital gain potential.

For this reason, index funds like the iShares S&P/TSX 60 Index Fund (TSX:XIU) can be great TFSA plays. As a highly diversified index ETF, XIU meets the moderate risk criterion mentioned previously.

However, being built on stocks, it can deliver a significant enough return to be worth holding in a TFSA.

What makes XIU a great ETF?

First, based on the TSX 60, it enjoys slight historical outperformance compared to the TSX Composite Index. Although there’s no guarantee that this will continue, it holds over a very long period.

Second, the fund has a fairly high distribution yield of 2.8%.

Finally, as a passively managed fund, it has low fees, with an MER of 0.18%.

Overall, XIU is a solid mix of value and growth potential that will reward you handsomely over the years if held in a TFSA.

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 Andrew Button owns shares of iSHARES SP TSX 60 INDEX FUND.

More on Dividend Stocks

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Royalty: 3 Fabulous Stocks to Buy Now for Decades of Passive Income

Rogers Communications stock and Canadian Natural Resources stock could pay you dividends for decades to come.

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in April 2024

For growth and dividends this April, look to these two REITs that have quite the promising present as well as…

Read more »