The Tax-Free Savings Account (TFSA) is perhaps one of the most potent savings tools available to Canadians. Similar to a Roth IRA in the U.S., the TFSA allows investors to put after-tax dollars to work in this account, which can grow tax-free over time (and be withdrawn without taxes in retirement). As such, from a cash flow perspective in retirement, this is among the best vehicles out there for those looking to create meaningful income to supplement government benefits, pensions and any other income available when it comes time to let go of one’s job.
Creating an account and funding it is the first step. However, investors looking to put capital to work in a TFSA ought to think about a few key considerations which can impact one’s returns over time.
Here are three top investment choices I think go well in a TFSA, and why investors may want to consider these options right now.
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Growth should be prioritized
Given the fact that capital gains aren’t taxed when funds are withdrawn from a TFSA (after one’s retirement age), putting long-duration growth assets in this account makes the most sense from a purely mathematical perspective.
Focusing on top-tier blue-chip quality growth stocks is the first place I’d start. Companies like Shopify would be great additions to a TFSA, but the reality is that nearly any growth stock in any market can be put in most TFSAs.
That leads me to my second point.
Diversification matters
I think investors want to ensure they’re properly diversified. That means not only across sectors and asset classes, but geographies as well.
Since many TFSAs are flexible in the investments one can put into these funds, I’m of the position that looking at top-tier international stocks can help provide not only the robust return profile investors are after, but smooth out returns over the long haul. That’s what we’re all after, of course.
Don’t be afraid to be passive in this fund
I think another top consideration for investors should be whether one wants to spend the time being a stock picker (and have the patience to stick with these picks for decades), or whether an exchange-traded fund (ETF) or index fund is a better choice. With many Canadian banks now offering very low-fee ETF options, picking a growth fund that matches one’s risk profile and investing time horizon can be beneficial.
I’d caution readers to check the fees before doing so, and ensure that the ETFs one holds also carry geographic diversification as well. Indeed, it goes without saying that talking to a financial advisor can pay big dividends (figuratively and literally) over the long-term, so that’s something to consider for those who don’t know where to start.
