2 Massive TFSA Mistakes to Avoid in 2021

TFSA users can derive the full tax-free benefits of their unique investment account by avoiding two massive mistakes. The high-yield Keyera stock is an eligible and ideal investment in a TFSA.

| More on:
Economic Turbulence

Image source: Getty Images

The Registered Retirement Savings Plan (RRSP) has been the staple of Canadians saving for retirement. However, the RRSP is now second only to the Tax-Free Savings Account (TFSA) as the preferred investment vehicle. If people could contribute to only one, the money will likely go into a TFSA.

A TFSA is excellent to save money for short-term financial goals. If you have a long-term horizon, the account is the best there is to build retirement wealth. All capital gains and dividends are tax-free. However, some users don’t derive the full tax-free benefits due to massive and costly mistakes.

1. Don’t belittle your TFSA

The term savings is perhaps why account holders mistake their TFSAs for an ordinary savings account. A Bank of Montreal survey reveals that users are underutilizing the account. On average, cash is the primary investment of 38% of the poll respondents. A TFSA can hold cash and other assets such as stocks, bonds, GICs, ETFs, and mutual funds.

The federal government introduced the TFSA in 2009 to encourage and help Canadians save and invest for the future. Hence, the contributions must work for the users. It means, therefore, the assets inside a TFSA should be income producing, not idle cash. Since money growth is tax-free, your balance will accumulate faster.

2. Don’t overcontribute

The Canada Revenue Agency (CRA) sets the annual contribution limit every year, so users have ample room to save at the beginning of each year. Since its inception in 2009, the TFSA cumulative contribution is now $75,500 in 2021. Unused contribution rooms carry over to the next year or indefinitely until you can use them or contribute again. However, the CRA is strict with its overcontribution rule.

It would be best if you did not go over the limit or else incur a penalty of 1% of the excess contribution every month. Monitor your available contribution room to avoid the needless penalty tax. Be mindful that if you withdraw after maxing out the limit, you can only recontribute the amount in the next calendar.

Key TFSA partner

High-yield dividend stocks are ideal investments in a TFSA, although sometimes they are risky. Be cautious and understand the nature of the business. Keyera (TSX:KEY) in the energy sector pays a lucrative 7.37% dividend. Your $6,000 will generate $442.20 in tax-free income. Assuming you’re a new user with $75,500 available room, the windfall is $5,564.35.

Keyera underperformed in 2020, with its -27.3% total return. However, there was no dividend cut. Over the last five years, the dividend-growth rate is 8.9%. The company expects to earn an annual return on capital of 10% to15% in 2022. The $5.76 billion energy infrastructure company is a vital cog in North America’s oil and gas midstream industry. It owns and operates raw gas gathering pipelines and processing plants.

While some industry peers disapprove, Keyera welcomes the federal government’s plan to hike carbon prices to $170 per tonne by 2030. Management is confident the company will do better with the hike and a clean fuel standard to reduce fuel emissions.

More awesome features

Besides earning and saving taxes simultaneously, TFSA users can withdraw any amount at any time without paying penalties. Furthermore, maximizing your TFSA won’t affect income-tested government benefits. TFSA withdrawals don’t count as taxable income.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends KEYERA CORP.

More on Dividend Stocks

A plant grows from coins.
Dividend Stocks

2 Young TSX Stocks You’ll Be Glad You Bought in 10 Years

Youth means nothing when you plan to hold strong companies long term. These two TSX stocks should therefore be first…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

Is it a Trap? 3 TSX Stocks With Ultra-High Dividend Yields 

Who doesn’t love dividends? But the high-interest rate environment makes ultra-high dividends unsustainable. Are these stocks a value trap?

Read more »

Value for money
Dividend Stocks

3 Value Stocks for Superior Returns in 2023

Given their solid underlying businesses, stable cash flows, high dividend yields, and attractive valuations, these three undervalued TSX stocks could…

Read more »

Financial technology concept.
Dividend Stocks

2 TSX Value Stocks to Buy for Peace of Mind (and a Crazy-Good Deal)

2 TSX stocks that could outperform in the long term.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

2 of the Best Canadian Dividend Stocks I’d Buy Before March 2023 Ends

Here are two of the best Canadian dividend stocks you can buy on a dip in March 2023 to hold…

Read more »

Double exposure of a businessman and stairs - Business Success Concept
Dividend Stocks

3 Value Stocks That Smart Investors Should Seriously Consider

You get it all with these stable stocks. They may have less growth now, but will have incredibly high growth…

Read more »

Chalk outline of two arrows pointing in opposite directions
Dividend Stocks

2 TSX Stocks I’d Buy Instead of Sitting on Cash

These two TSX stocks are my top choices if you want companies that are going to recover quickly after a…

Read more »

Canadian Dollars
Dividend Stocks

Want $1,000 Per Quarter in Passive Income? 2 TSX Stocks That Do the Job

Are you looking to earn $1,000 in passive income each quarter? These two TSX dividend stocks can help you achieve…

Read more »