A look at the best TFSA investments for maximum portfolio gains

The best TFSA investments provide you with tax advantages, but you need to pick your investments wisely

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

Here’s a look at some of the best TFSA investments you can make to ensure you’re getting the maximum profit—and tax benefits—from your account.


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A look at some of the best TFSA investments and how to choose between investing in a TFSA and a registered retirement savings plan (RRSP)

Your TFSA can generally hold the same investments as an RRSP. This includes cash, mutual funds, publicly traded stocks, GICs and bonds.

As mentioned, contributions are not tax deductible, as they are with an RRSP. However, withdrawals from a TFSA are not taxed. This makes the TFSA a good vehicle for more short-term savings goals.

If funds are limited, you may need to choose between RRSP and TFSA 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.

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.

Over the years, as the value of your TFSA increases, you could switch to a portfolio of conservative, mostly dividend-paying stocks spread out across most if not all of the five main economic sectors.

ETFs are among the best TFSA investments, especially when you are first starting out

When you are first starting out with your TFSA, or making small monthly contributions, you could look to low-fee index funds for TFSA investing.

Over the years, as the value of your TFSA increases, you could switch those funds into a well-diversified portfolio of conservative, mostly dividend-paying stocks.

Just remember to follow our three-part Successful Investor philosophy with your overall portfolio—including your TFSA:

  • Invest mainly in well-established companies;
  • Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; the Consumer sector; Finance; Utilities);
  • Downplay or avoid stocks in the broker/media limelight.

Blue chip stocks and dividend-paying stocks are not necessarily the best TFSA investments

One of the best ways of picking a quality Canadian blue chip dividend stock is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings and issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one thing that all the best dividend stocks have in common.

For a true measure of stability, focus on companies that have maintained or raised their dividends during economic and stock market downturns. These firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.

Canadian taxpayers who hold Canadian dividend stocks get a special bonus. Their dividends are eligible for the dividend tax credit in Canada.

This means that dividend income will be taxed at a lower rate than the same amount of interest income (Investors in the highest tax bracket pay tax of around 29% on dividends, compared to 50% on interest income—investors in the higher tax bracket pay tax on capital gains at a rate of 25%.)

Note, however, that this dividend tax credit, which will cut your effective tax rate—is only available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA. So, if your overall portfolio includes both high-quality dividend paying and non-dividend-paying Canadian stocks, you’ll want to hold the dividend payers outside of your TFSA.

The best TFSA investments are not high-risk investments

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.

So we think you are best to hold lower-risk investments in your TFSA. That’s because as mentioned, you don’t want to suffer big losses in these accounts. If you do, you can’t use those losses to offset capital gains.

What have been some of the best investments you’ve added to your TFSA?

What mistakes have you made with your TFSA, and how have you corrected those mistakes?

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