Are You Using Your TFSA the Right Way? Many Canadians Aren’t

Explore effective investment strategies in your TFSA to enhance returns instead of using it simply as a savings account.

Puja Tayal

Puja Tayal has been writing for Motley Fool Canada since 2020. Her love for writing inspired her to start a college newsletter. With a Bachelors's degree in Finance and Accounting and CFA Level 1, Puja strives to transform stock discussions into breakfast table chats through her articles. A movie buff and a finance geek, Puja weaves superheroes, cartoons, and novels to tell you a story touching different aspects of investing, from portfolio and tax planning to retirement savings. Follow her on Twitter for more stories.

Published May 8, 4:20 pm EDT

| More on: CLSGRT.UNSHOP

Key Points

Avoid Common TFSA Mistakes for Optimal Growth: Many Canadians misuse TFSA by treating it as a regular savings account, keeping money idle, or investing in US dividend stocks subject to high withholding taxes without tapping into the full growth potential of TFSA’s tax-free advantages.
Strategic Long-Term Investing and Rebalancing in TFSA: To fully leverage TFSA's benefits, focus on long-term investments in high-growth stocks like Celestica, utilize rebalancing strategies with cyclical stocks such as Shopify and Granite REIT, and manage a compact, diversified portfolio for substantial, tax-free wealth accumulation.

Simply owning Nvidia shares won’t make you a millionaire if you don’t use them the right way. You may see two individuals investing the same amount in the same stock but with stark differences in the returns. The difference comes from the investment strategy.

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Common TFSA mistakes Canadians make that destroy TFSA wealth

Keeping money idle in a TFSA: Most people make the mistake of making a Registered Retirement Savings Plan (RRSP) their primary investment account and using a Tax-Free Savings Account (TFSA) as a savings account. They keep their money idle in a TFSA, just like maintaining a bank balance.

Investing in term deposits through a TFSA: Many people only invest in bonds and term deposits through a TFSA. Although it is a savings account, the Canada Revenue Agency (CRA) allows you to invest in publicly-traded stocks and ETFs

Investing in US dividend stocks: While the TFSA allows you to invest in US stocks, dividend stocks are not a good option. The US charges a 15% withholding tax on dividends to Canadians under the double taxation treaty. A TFSA cannot shield you from it. And since you don’t pay any tax on TFSA income in Canada, you cannot claim a credit for the US withholding tax on your Canadian tax return.

Keep withdrawing from a TFSA: Canadians put money in a TFSA only to withdraw it later in the same year. According to Statistics Canada data, average TFSA withdrawals ($12,292) were higher than average TFSA contributions ($11,251) in the 2024 tax year. Not giving your investments time to grow is a huge mistake, as a TFSA allows them to grow tax-free.

Here is the right way to use a TFSA

Invest long-term: Only invest in long-term stocks to create wealth or for financial objectives like emergency funds, funding your startup, or retirement. Such objectives need the flexibility to withdraw a lump sum amount.

A 10-year return on hyper-growth stocks like Broadcom and Shopify (TSX:SHOP) can grow your money 3,000–4,000%. It means a $10,000 investment can become $300,000. If done through a TFSA, the entire $300,000 is tax-free, and you can withdraw it anytime once the portfolio has grown significantly.

Invest in high-growth stocks: A TFSA is ideal for Canadian and US growth stocks. Now is a good time to buy Celestica (TSX:CLS) stock for the long term. The company is in the hypergrowth phase, expanding operations in Taiwan, Texas, and Canada. It has moved from being an electronics manufacturer to an original design manufacturer. It has bagged three hyperscale customers and is now networking in Google and Advanced Micro Devices circles. Celestica makes Ethernet switches for artificial intelligence (AI) data centres and communication infrastructure.

Even if the AI data centre cycle cools, it will benefit from a communications upgrade. Its growth story could see two to three future growth cycles with future AI infrastructure upgrades. CLS stock can give you that 1,000% return in 10 years if you stay invested.

Rebalance portfolio: A TFSA allows your investments to grow tax-free, making rebalancing tax-efficient. Rebalancing cyclical and seasonal stocks can help you make higher returns. Shopify (TSX:SHOP) and Granite REIT (TSX:GRT.UN) follow a pattern. While Shopify offers an e-commerce platform service, this makes its stock price rally during the holiday season as online store traffic increases. March to June are seasonally weak after the holiday season. Buying in March and selling in the November or February peak can help you grow your money by 50–80% annually.

Granite REIT caters to distribution services, offering warehouse and small storage facilities to e-commerce platforms. Its seasonally weak month is October, and strong months are January to March. You can sell Granite REIT in March to buy Shopify stock. This rebalancing can happen tax-free, as no capital gain or dividend tax is charged in a TFSA.

Investor takeaway

There is a misconception that many stocks mean higher returns. You don’t need 40–50 stocks to make a diversified portfolio. Just a handful of five to seven stocks is sufficient to diversify your portfolio and rebalance to generate good returns.