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4 Situations Where You Shouldn’t Put Stocks in a TFSA

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There’s one very good reason to put your investments in a Tax-Free Savings Account (TFSA): the earnings you make are not taxable on eligible investments. However, it’s important to remember that the TFSA is just one option and it isn’t always the best option. There are plenty of good reasons why you shouldn’t hold stocks in a TFSA.

Here are four of them:

You have capital losses you can use

You don’t need a TFSA if you have capital losses from a prior investment that you can offset capital gains with. A TFSA may not be able to accommodate everything, anyway, especially if you have a lot of money to invest. If you have capital losses, you can put dividend stocks in your TFSA while holding growth stocks outside of it.

This way, if your growth stocks underperform you can at least have the benefit of being able to use those capital losses. And if they do well, you can shield part or all of those gains with your capital losses.

You’re investing in high-risk stocks

Once you’ve lost the contribution room in a TFSA, you can’t get it back. Aside from just waiting for the government’s next annual increase in the TFSA, if you’ve lost money because you invested in a risky stock, you don’t get to replenish that contribution room. Only if you withdraw funds from a TFSA can you replace that contribution room in the following year.

If you’re taking on risk, it’s best to do it outside a TFSA where you can benefit from utilizing a capital loss in future periods.

You want to reduce your taxes

One of the advantages of registered retirement savings plans (RRSPs) over TFSAs is that the contributions you make to an RRSP can reduce the income tax that you’ll pay.

It’s one of the best perks of the RRSP that taxpayers often employ to bring down their tax bills. This year, the deadline to contribute to an RRSP and use it toward your 2019 tax return is Mar. 2, 2020.

You want to hold U.S. dividend stocks

If you earn dividends from U.S. stocks inside a TFSA, you’ll incur withholding taxes. That’s not the case if you were to hold the investments in your RRSP.

The default withholding tax is 30% for a U.S. dividend in your TFSA, and while you can get it reduced, you won’t get it eliminated entirely. That’s why if you’re holding U.S. stocks and primarily doing so for the dividend, an RRSP may be a better option than a TFSA.

Key takeaway for investors

A TFSA is not a perfect solution for all investors, even though tax free does sound enticing. Depending on your strategy, you may find that an RRSP, TFSA, or just a regular investing account may suit your needs best. But even if you’ve figured out where you want to invest, you may still struggle with what to invest in.

A safe option for investors can be an exchange-traded fund like the BMO Nasdaq 100 Equity Hedged to CAD Index ETF that can give you a little bit of everything—dividends and growth.

Ultimately, there’s no one path to growing your savings. If you’re unsure of which strategy is the right one for you, it may be worth discussing it with a financial advisor.

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 David Jagielski has no position in any of the stocks mentioned.

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