The Tax-Free Savings Account, or TFSA, was introduced in 2009 and has since gained popularity as a registered account among Canadians. The TFSA is tax sheltered, which means any returns derived in this account are exempt from Canada Revenue Agency (CRA) taxes. These returns can either be in the form of interests, capital gains, and even dividends.
Moreover, a Canadian resident over the age of 18 can use the TFSA to hold various qualified investments such as stocks, bonds, exchange-traded funds, guaranteed income certificates, and mutual funds.
So, the registered account can be used to help Canadians achieve their financial goals, which might range from saving for the down payment of your first mortgage to funding a child’s education. The investments held in a TFSA can be sold, and the proceeds can be withdrawn at any time, providing investors with much-needed short-term liquidity amid an uncertain macroeconomic backdrop.
But you also need to avoid these three big TFSA mistakes in 2023 that may hinder your wealth-creation process.
Avoid TFSA overcontributions
The most common mistake among TFSA investors is overcontributing to this account. You need to keep a close watch on the annual contribution room available, which changes each year. For example, in 2023, the TFSA contribution room has increased to $6,500 from $6,000 to account for high inflation rates.
If you overcontribute, the CRA will levy a penalty tax of 1% per month on this amount.
Avoid high-frequency trading
You should not use the TFSA to day trade as any business activity in the registered account is prohibited by the CRA. In case regulators detect any unusual activity, such as high-frequency trading in your TFSA, all earnings will be taxed as business income.
Avoid holding cash in a TFSA
Another big mistake TFSA investors need to avoid is holding cash in this account. Yes, investing is risky, but not putting your funds to work is even riskier. It’s imperative for you to consistently outpace inflation and build long-term wealth, indicating you need to hold an optimized portfolio of stocks and bonds in a TFSA.
Use the TFSA to hold quality growth stocks such as Shopify
Canadians should leverage the benefits of the TFSA and increase exposure to quality growth stocks such as Shopify (TSX:SHOP). Valued at a market cap of $107 billion, Shopify is among the largest tech stocks on the TSX.
Shopify has already created significant wealth for early investors and has returned 2,600% to shareholders since its initial public offering. Despite its outsized gains, SHOP stock is down 61% from all-time highs, allowing you to buy the dip.
Shopify is wrestling with a rapid deceleration in top-line growth due to the reopening of economies and lower consumer spending. An inflationary environment is also acting as a headwind for Shopify, resulting in higher operating expenses and narrower profit margins.
But Shopify remains a solid long-term investment as e-commerce currently accounts for 15% of total retail sales in the United States. As companies continue to establish an online presence, Shopify is well positioned to widen its customer base and grow revenue consistently in the upcoming decade.
Shopify is already the second largest e-commerce platform in the U.S. after tech giant Amazon. Its wide economic moat and expanding portfolio of products and services make Shopify stock a good investment for your TFSA in 2023.
