TFSA Users: 49% of Canadians Are Making This Mistake

Too many Canadians are unaware of the full wealth-creative effects of the TFSA, with nearly half of Canadians unaware it can be used to invest.

TFSA and coins

Image source: Getty Images

The Tax-Free Savings Account (TFSA) is a powerful tool that can help many Canadians get ahead. With Canada Revenue Agency taxes taken out of the equation, the TFSA can allow one to unlock the full power of tax-free long-term compounding. Indeed, the wealth-creative powers are as difficult to fathom as they are profound.

But with a recent Bank of Montreal survey revealing that only 49% of Canadians are aware that a TFSA can hold investments in addition to cash. There’s no question that many TFSA users aren’t unlocking the power of their TFSAs, with cash savings being the primary investment, accounting for around 38% of the average Canadians’ TFSA.

Are you one of many Canadians using your TFSA as a mere savings account?

While there’s nothing wrong with holding a bit of dry powder on the sidelines, especially after one of the worst crises in recent memory, having a majority of one’s TFSA in those “high-interest” savings accounts is to leave a tonne of wealth-creation on the table.

While underusing one’s TFSA may seem like a harmless mistake over the short- to medium-term, over the course of decades, not using one’s TFSA to invest in higher return securities could mean the difference between a comfortable retirement and a frugal one, or perhaps, no retirement at all, given how difficult it is to make ends meet on just OAS or CPP pension payments alone.

Once Canadians recognize the magnitude of growth that they could be missing out on by hoarding cash in a TFSA in an era of near-zero interest rates, only then can they make moves to correct their mistakes. In a prior piece, I highlighted the name of the account was a misnomer.

Unless Canadians took the time and effort to look up the uses of the Tax-Free Savings Account, they’d think it’s just some sort of special savings account that can shield their interest from the taxes from the CRA.

Don’t over-save! Optimize your TFSA for long-term growth

Given how negligible interest on savings has become amid the COVID-19 crisis, savings has become, by far, the worst use of one’s TFSA, even for the most conservative of investors. Given the unprecedented response to the crisis, we could be in for an unchecked rise in the rate of inflation, making savings and near-zero interest rates a waste of one’s tax-free advantage.

Indeed, the opportunity cost of hoarding excessive amounts of cash in a TFSA is high. If you’re one of many Canadians who’s been using their TFSAs to invest systematically in stocks, then you’re ahead of the pack. But if you had no idea that you can use your TFSA beyond just savings, you should seek to invest in stocks, ETFs, REITs, or any other rewarding investment instrument that can allow you to get your TFSA wealth-creative edge back.

Even Steady Eddie utility stocks like Emera can help you get you where you need to be with your TFSA retirement fund. The stock sports a sound 4.7%-yielding dividend, which blows savings interest or even GIC rates right out of the water. If you’re looking to build a nest egg over the course of years or decades at a time, you’ll also likely be in for substantial capital appreciation and some handsome dividend growth along the way.

The Foolish takeaway

Your TFSA is best used as an investment vehicle, not as a mere savings account. By using a TFSA solely as a savings account, you’re likely to lose purchasing power through the insidious effects of inflation, dragging you farther away from the retirement for which you’ve been saving so hard.

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 Joey Frenette owns shares of BANK OF MONTREAL.

More on Investing

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.

3 TSX Stocks I’d Buy This Week

Are you struggling to find stocks to add to your portfolio this week? Here are my three top picks!

Read more »

Target. Stand out from the crowd
Dividend Stocks

3 Oversold Stocks to Buy for Passive Income

These three oversold stocks aren't just great right now for high passive income, but provide exposure to high-growth industries.

Read more »


3 Stocks to Hold in Your TFSA for Easy Tax-Free Income

Telco stocks like BCE Inc (TSX:BCE) offer high dividend income -- especially when held in a TFSA!

Read more »

Hand arranging wood block stacking as step stair with arrow up.

Why Shawcor (TSX:SCL) Stock Jumped 9% in September

Shawcor Ltd. (TSX:SCL) stock has rallied off big gains after announcing that big changes may be ahead over the next…

Read more »

Mature financial advisor showing report to young couple for their investment
Bank Stocks

Retire Young: How to Turn a TFSA or RRSP Into $1 Million

Here’s how you can turn your TSFA or RRSP into $1 million or more to plan your early retirement.

Read more »

A person holds a small glass jar of marijuana.
Cannabis Stocks

Cannabis Stocks Jump: What Investors Need to Know

Cannabis stocks have started to recover in recent weeks, showing there might be signs that now is the time to…

Read more »

money cash dividends
Dividend Stocks

TFSA Passive Income: Invest $30,000 to Earn $500,000 + $7,800 in Tax-Free Dividends

Make the power of compounding work for you and turn a $30,000 investment into $500,000 in the next 20 years.

Read more »

Online shopping
Tech Stocks

Why Shopify Stock and Other Tech Stocks Jumped on Tuesday

Shopify (TSX:SHOP) stock and others started climbing on Oct. 4, but will the rise continue or fall back?

Read more »