Your Tax-Free Savings Account (TFSA)Â contribution room is set to increase in 2025.
Last month, Parliament approved $7,000 worth of additional TFSA contribution room for the upcoming year. That means that even if your TFSA is maxed out now, you will be able to invest more money in it next year. And if you have unused TFSA contribution room now, it will increase by $7,000 next year. Score!
With all that being said, it pays to make the most of your TFSA contribution room. If you go into risky speculative investments in your TFSA, you may find yourself losing money. Losing money on TFSA investments is a double whammy of loss because you can’t use TFSA losses to offset your tax bill like you can with losses in taxable accounts. So, if you’re going to invest in a TFSA, it pays to invest well. With that in mind, here are some ideas for how to use your TFSA contribution room in 2025.
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Index funds
When it comes to sensible investment ideas, it’s hard to beat index funds. Index funds are diversified stock portfolios that trade on stock exchanges like individual stocks. Because they are diversified, they have less risk than individual stock positions do. They have only market risk, not specific risk. So, they are good assets to invest in.
Consider iShares S&P/TSX 60 Index Fund (TSX: XIU). It’s a Canadian exchange-traded fund (ETF) built on the TSX 60 stock market index. It consists of 60 large-cap stocks, which give it a decent amount of diversification. It also boasts a fairly low management expense ratio of 0.16%, which is lower than most funds. Finally, it is Canada’s biggest and most widely traded fund, which means it has high liquidity and a tiny bid-ask spread. The bid-ask spread is the difference between what buyers and sellers want; market makers capture this spread as a fee, so the smaller it is, the less you pay to market makers.
XIU has many of the characteristics that investors seek in funds. So, it’s definitely one worth considering.
Bonds
Purely from a tax perspective, bonds are the best assets to hold in a TFSA. The reason is that bonds are taxed more heavily than dividend stocks, which in turn are taxed more frequently than non-dividend stocks. The extremely high tax rate you pay on bond interest argues for sheltering bonds in a TFSA.
Dividend stocks
Last but not least, we have dividend stocks. These don’t get taxed as much per dollar as bonds do, but their dividends sometimes grow, and that can create higher-than-expected future taxes. So, it’s a good idea to hold dividend stocks in a TFSA.
Consider Fortis (TSX: FTS). Fortis is a Newfoundland-based utility that owns assets in Canada, the U.S., and the Caribbean. 98% of its assets are regulated utilities, which means that it enjoys stable, recurring revenue and some protection from competition. Fortis has raised its dividend every year for 52 years. It has a reasonably modest debt-to-equity ratio for a utility. It also has respectable profit margins and a track record of investing in growth. Overall, it’s one worth considering for your TFSA.
