Last week, I’d discussed some of the worst mistakes investors can make in their Tax-Free Savings Account (TFSA). Today, I want to go over some important tips that can boost what has become the most popular registered account. Let’s jump in.
Important TFSA tip: Keep track of your contribution room
Naturally, this tip is connected to a mistake that investors can make in their TFSA. Canadians who overcontribute will be subject to a penalty tax of 1% per month. In order to avoid situations like this, investors need to keep track of their contribution room.
Canadians should remember that any withdrawals in this account will count against your contribution room for that calendar year. For example, if you had maxed out your TFSA to $69,500 in 2020 and took out $3,000 in the spring you could not re-contribute until 2021. Moreover, age is a big factor for a TFSA. Contribution room builds from the time a Canadian is eligible to open a TFSA. An investor who turned 18 in 2018 will only have the contribution room that has been annually available from that date.
Take advantage of its versatility
The RRSP has its benefits, but it is more rigid in its application. It is a retirement account, and investors should treat it as such when formulating their strategy. A TFSA, however, can be used as a retirement account or a short-term savings vehicle. Ideally, Canadians will use it in a long-term capacity. This is where the value of this account really comes out.
For those who want to use the TFSA in a short-term capacity, you can make withdrawals without taking income penalties like the RRSP. Moreover, the TFSA can be a great vehicle for retirees. The RRSP must be turned into a RRIF at a specified age range. The TFSA can be utilized at its full capacity at all ages. This way, retirees can use it as a source of capital growth and/or income.
TFSA: Stick with a strategy
Last spring, I’d discussed some of the top TFSA strategies for investors to mull over. The versatility of this account allows Canadians to pursue a growth strategy, an income-oriented portfolio, or a more balanced strategy.
Enbridge is a great energy stock for TFSA investors who want to gobble up tax-free income. Its shares have dropped 16% in 2020 as of close on September 17. However, the energy sector has gained some traction after being battered by the COVID-19 pandemic. Enbridge currently offers a quarterly dividend of $0.81 per share. This represents a monster 7.9% yield.
Canadians on the hunt for growth may want to consider WELL Health Technologies. This is a healthcare and technology stock that has thrived in the face of the COVID-19 pandemic. The crisis has forced healthcare consultations into the digital space. WELL Health has seen telehealth activity surge in recent months. Its stock has soared over 340% in the year-to-date period.
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 Ambrose O'Callaghan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.