Unused Tax-Free Savings Account (TFSA) contribution room is a gold mine yet to be explored. Many millennials are making the biggest mistake of keeping their TFSA contribution unused. As per 2024 data from Statistics Canada, Canadians aged 35 to 39 had an average unused contribution room of $58,732 in 2022. It pays to stay invested in the market rather than not invest at all. However, one should invest with caution as the Canada Revenue Agency (CRA) is watching your TFSA activities.
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TFSA investors should avoid these red flags
TFSA’s biggest benefit is the tax-free growth of investment and tax-free withdrawals. Had you invested $5,000 in Bombardier in January 2021, it would be worth $97,485 today. And had you invested through a TFSA, you could withdraw the entire amount tax-free. That is the power of a TFSA.
While the account does not tax your investment income, the CRA keeps an eye on the instrument you are investing in and the frequency of your investment. The objective of the TFSA is to encourage Canadians to save in publicly traded and regulated investment options that can give returns in the long term.
Red flag #1: Investing in unqualified investments
Very highly volatile investment instruments, such as crypto and derivatives, do not qualify as TFSA investments. The CRA allows you to invest in stocks, bonds, and exchange-traded funds that trade on popular exchanges, like the TSX, NYSE, and NASDAQ.
Yes, you can invest in U.S. stocks and enjoy the same tax-free investment income. However, dividends from the US stocks are subject to withholding tax. Hence, the best TFSA investments are U.S. growth stocks, like Broadcom and Nvidia (NASDAQ:NVDA). They can double and triple your money in a few years.
Red flag #2: Trading in TFSA
Another area CRA is watching is trading activities. You can buy and sell TSX stocks, but the frequency also plays a role. Remember, TFSA is not for trading but for investing. If you are buying and selling a single stock too frequently, the CRA might keep a lookout. That doesn’t mean you cannot keep buying a particular stock in small quantities.
Suppose you invest $100 every week in two stocks to accumulate sizeable number of shares, that is still investing. This would become trading if you keep selling that share in small intervals after buying, reducing the holding period of the stock. The CRA has no specific threshold on what frequency counts as trading, but a short holding period is sure to raise eyebrows.
Red flag #3: Miscalculating contribution room
Although the biggest problem with millennials is that they undercontribute to their TFSA, this notion is based on average balance. Your TFSA balance doesn’t determine your contribution room. The 2026 TFSA contribution limit is $7,000. If you invest $7,000 in February, withdraw $4,000 in April, and re-contribute that $4,000 in October, you would have contributed $11,000 in 2026 even though your balance is only $7,000.
If you didn’t have any contribution room from the past year, you will be charged 1% penalty on the $4,000 surplus contribution for each month you stay invested. That doesn’t mean you cannot contribute what you withdraw. The CRA will add your 2026 TFSA withdrawals to your contribution room on January 1, 2027.
The right way to invest in a TFSA
TFSA is a powerful tool and can earn you millions in tax-free income if used correctly. Firstly, invest in high-growth stocks and stay invested for the long term. Secondly, if you want to withdraw every month, keep rebalancing by selling a few growth stocks to book a profit and use that money to buy high-yield dividend stocks. That way, you will not withdraw your investments but reinvest them and get payouts.
NVIDIA is a growth stock to buy and hold for the long term, even after it has priced in its artificial intelligence (AI) rally. AI is not just a wave but a revolution that is shaping the future, just like the internet in the early 2000s and the cloud in the early 2010s. Many companies are exploring ways to derive value from AI. Meanwhile, Nvidia is preparing for autonomous cars and AI at the edge, which will be the next big growth cycle in the next 10 years.
