Topic: How To Invest

Investor Toolkit: How to make the most of your tax free savings account (TFSA)

Low risk investmentsWe regularly publish Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investment strategy, and shows you how you can put it into practice right away.

Tip of the week: “How to make the most of your tax free savings account”

The federal government first made the tax free savings account (TFSA) available to investors in January 2009. These accounts let you earn investment income — including interest, dividends and capital gains — tax free.

You can now contribute a maximum of $5,500 to your TFSA each year. However, if you have not contributed in the past, or did not meet maximum contributions in any given year, you can catch up on unused contributions. (maximums are $5,000 per year from 2009 to 2012, $5,500 per year from 2013 to 2014, $10,000 in 2015, and $5,500 in 2016.)


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Tax-free savings accounts let you earn investment income — including interest, dividends and capital gains — tax free. But unlike registered retirement savings plans (RRSPs), contributions to TFSAs are not tax deductible. However, withdrawals from a TFSA are not taxed.

Here are three tips you can use to make sure you’re getting the most profit — and tax benefits —from your TFSA:

  1. Avoid putting higher-risk investments in your TFSA: Holding higher-risk stocks in your TFSA is a poor investment strategy. That’s because high-risk stocks come with a greater risk of loss. If you lose money in a TFSA, you lose both the money and the tax-deduction value of the loss. (Outside your TFSA, you can use capital losses to offset taxable capital gains.)You’ll also lose the main advantage of a TFSA: sheltering gains from tax. You won’t have gains to shelter if the value of your investments falls.
  2. Your current income can help you decide between your TFSA and your RRSP: If funds are limited, you may need to choose between TFSA and RRSP contributions.RRSPs may be the better choice in years of high income, since RRSP contributions are deductible from your taxable income. In years of low or no income — such as when you’re in school, beginning your career or between jobs — TFSAs may be the better choice.Moreover, investing in a TFSA in low-income years will provide a real benefit in retirement. When you’re retired, you can draw down your TFSA first, then begin making taxable RRSP withdrawals.
  3. Your TFSA is a good place to hold exchange-traded funds (ETFs): The limit is now $41,000 so you could build a diversified portfolio of conservative, mostly dividend-paying stocks spread out across the five main economic sectors (Manufacturing & Industry, Resources, Finance, Utilities and Consumer).However, you could also look to exchange-traded funds for TFSA investing.You could pick from the carefully selected ETFs we recommend in our Canadian Wealth Advisor newsletter’s ETF Portfolio. It’s one of three portfolios the newsletter offers to conservative and income-seeking investors (the other two are the Safety-Conscious Stock Portfolio and the REIT & Trust Portfolio). We continually monitor and update all three portfolios.

Note: This article was originally published in 2011 and last updated on April 26, 2017

Comments

  • Dear Pat,
    Very sound advice indeed.I’d add a recommandation NOT to buy foreign -i.e. US – equity as the income -dividends or interests – will be taxable in the US and cannot be recouped in Canada.
    Yours,
    Davy

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