In 2025, you’ll be getting an extra $7,000 worth of Tax-Free Savings Account (TFSA) contribution room. That’s an extra $7,000 worth of account room in which to save and invest tax-free.
Such an addition of tax-free saving power may have you feeling excited. However, it’s important to remember that not all assets are suitable for a TFSA. Cash balances with low interest rates are not ideal for the TFSA, as they incur little returns in need of taxation. Likewise, non-dividend stocks that you hold for life don’t benefit much from being held in a TFSA, as they will not be taxed unless they initiate a dividend. So, there’s some strategy to getting the most out of your TFSA.
In this article, I will explore the three most essential moves for Canadian TFSA investors in 2025.
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Move #1: Diversify
Diversification is probably the single most important move for you as an individual investor to make in 2025. Whether you hold dividend stocks, non-dividend stocks, bonds or anything in between, it pays to spread your eggs across multiple baskets.
The easiest way to achieve portfolio diversification is to skip stock picking and invest in exchange-traded funds (ETFs) instead. ETFs provide diversification without the need to handpick large numbers of stocks.
Consider BMO Canadian Dividend ETF (TSX: ZDV). It’s an ETF made up primarily of high-yield Canadian stocks in sectors like energy, utilities, and banking. It has 50 holdings in total, which provides a respectable amount of diversification. It has a 3.81% annualized yield, which can provide significant cash income. Finally, ZDV pays its dividend every month, which is a much higher income frequency than most ETFs. Because it pays out such a large dividend on a very frequent basis, ZDV benefits from being held in a TFSA.
Move #2: Have some fixed-income exposure
Another TFSA move to make is getting some fixed-income exposure. Fixed-income investments like bonds and Guaranteed Investment Certificates (GICs) get taxed at higher rates than dividend stocks. The reason is that dividends have the dividend tax credit applied against them, while bonds have no such credit. An extra dollar of bond interest is taxed almost the same way that employment income is. So, if you’re going to hold bonds or term deposits, it pays to hold them in a TFSA.
As for why you should hold fixed incomes, they are ideal for when you have imminent liquidity needs. For example, if you’re planning to buy a home or car soon, it pays to have some of your money in bonds (that you hold to maturity) rather than stocks. The reason is that stock market volatility can disrupt your plans to have a certain amount of dollars in your account on a set date. You probably shouldn’t have all of your money in bonds, but a 10% to 40% allocation might make sense.
Move #3: Keep certain things out of the TFSA
Last but not least, there are certain assets you shouldn’t hold or try to hold in a TFSA. A share in a small business you own is one example of a thing that’s not Kosher for TFSAs — if you try to put such a share in a TFSA, the Canada Revenue Agency will likely tax you. It also doesn’t make much sense to hold low-interest cash balances or non-dividend stocks you plan on holding for life in a TFSA, as such things are either not taxed or taxed very little.
Basically, the bigger and more frequent the expected cash return, the more the asset benefits from being held in a TFSA. If you keep that principle in mind, you should get some benefits from having a TFSA.
