The Motley Fool

Warning: Most Canadians Are Using the TFSA Incorrectly

Image source: Getty Images

The average Canadian saver is making a big mistake with their Tax-Free Savings Account (TFSA). They’re leaving the account in cash. Here’s why that’s such a bad idea and what savers should be doing instead. 

TFSA awareness

The TFSA is a wildly popular and remarkably effective program. According to a survey conducted by Pollara Strategic Insights, 53% of Canadians deployed some cash in their TFSA this year. Last year, the rate was 58%. 

However, less than half of TFSA users said they knew the account could be used for investments besides cash. In fact, 38% of the total national TFSA amount is held in cash. That’s a mistake for two reasons: taxes and interest rates. 

Interest rates have been low since the financial crisis erupted more than a decade ago. This year, rates plunged to historic lows. Even the best high-interest savings accounts only offer 1.5% to 2%. That rate is simply too low to help you generate wealth over time. 

Another reason keeping cash in the TFSA is a mistake is the lack of tax benefits. Any return earned in the TFSA is tax-free. This means your 2% interest payment is completely shielded from the Canada Revenue Agency. However, you could be earning much higher returns with the same tax benefits. 

By leaving cash in the account, you miss out on the TFSA’s true potential.

Better alternatives

Rather than considering the TFSA a savings account, consider it an investment vehicle. Deploy the majority of your cash in investment opportunities that offer you either passive income or the potential for capital gains. 

A robust dividend stock like Telus Corporation (TSX:T)(NYSE:TU) could be an example of the former. Telus offers a stunning 4.8% dividend yield. That’s already twice as high as any high-interest savings account. Meanwhile, the business of selling wireless data and phone services is as robust and essential as any other utility now. 

Telus stock price has tripled in the past decade, which makes this a dividend-growth stock — the perfect fit for any TFSA. 

However, if you’re looking for capital gains and don’t need tax-free passive income right away, Kinaxis (TSX:KXS) is a better option. Kinaxis stock is up 1,221% since it listed in 2014. That means a $6,000 investment in the stock six years ago would be worth $132,100 by now. Bear in mind, that’s completely tax-free. 

There’s still plenty of room for the company to grow further. Kinaxis offers supply-chain management software, which will be essential as global trade rebounds in 2021. If you’re looking to accumulate immense wealth in your TFSA, this one should be on your radar. 

Bottom line

Keeping cash in your TFSA is a tragic waste of opportunity. Canada’s taxes on income and consumption are some of the highest in the world. The TFSA offers a tax shield for savings and investments. Deploying this tax-protected cash into a robust growth stock like Kinaxis should be the obvious choice.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

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 Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool recommends KINAXIS INC.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.