The best TFSA investments provide you with tax advantages, but lingering COVID-19 market volatility still highlights the need to pick your investments wisely; the best investment for TFSAs are those with the strong potential for solid and dependable gains
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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Canadian Blue Chip Stocks: Bank of Nova Scotia Stock, CP Rail Stock, CAE Inc. Stock and more.
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. That means the best investment for TFSAs include 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 means the best investment for TFSAs is generally focused on helping you meet shorter-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.
The best TFSA investments include ETFs, especially when you are first starting out
When you are first starting out with your TFSA, or making small monthly contributions, low-fee index funds are among the best investment 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.
The best TFSA investments don’t necessarily include Blue chip stocks and dividend-paying stocks
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.
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.
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. That reality is key to determining the best investment for TFSA investing.
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 is one of the best investment for TFSA that you’ve made?
What mistakes have you made with your TFSA, and how have you corrected those mistakes?
This article was originally published in October 2018 and is regularly updated.
Comments
Subscriber
Hello,
why would it be better to hold dividend payer outside the TFSA ?
Oustside, you would be able to have tax credit on dividend income, ok.
But in the TFSA it would be 100 percent as you would not pay tax at all no?
Do I misunderstand anything ?
David
In general, we think you are best to hold lower-risk investments in your TFSA (including high-quality dividend-paying Canadian stocks and REITs). That’s because you don’t want to suffer big losses in these accounts. If you do, you can’t use those losses to offset capital gains, as is the case with taxable (non-registered) accounts. 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.
You can hold U.S. stocks in your TFSA, but Canadian shareholders pay a 15% withholding tax on dividends from U.S. stocks. In most cases, if you hold the stocks outside your RRSP, you can get a Canadian income tax credit to offset that tax. If you hold U.S. or foreign stocks in an RRSP, the withholding tax doesn’t apply.
However, note that if you hold U.S. stocks in a TFSA, you can’t get back the withholding tax.
That doesn’t mean you can’t hold U.S. stocks in a TFSA—but you’ll want to hold U.S. dividend payers outside your TFSA—and hold U.S. non-dividend payers (or low payers) inside your TFSA.
It’s very difficult to navigate your website. It’s cluttered up with promotional offers and gimmicks. It’s like looking for 1 letter on the mail that has arrived along with 20 pieces of junk mail. You should dial back the self promotion and BS.
Learn everything you need to know in 'The Best Blue Chips for Canadian Investors' FREE Special Report from The Successful Investor.
Canadian Blue Chip Stocks:
Bank of Nova Scotia, CP Rail, CAE Inc. and more.
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Hello,
why would it be better to hold dividend payer outside the TFSA ?
Oustside, you would be able to have tax credit on dividend income, ok.
But in the TFSA it would be 100 percent as you would not pay tax at all no?
Do I misunderstand anything ?
David
Thanks for your question.
In general, we think you are best to hold lower-risk investments in your TFSA (including high-quality dividend-paying Canadian stocks and REITs). That’s because you don’t want to suffer big losses in these accounts. If you do, you can’t use those losses to offset capital gains, as is the case with taxable (non-registered) accounts. 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.
You can hold U.S. stocks in your TFSA, but Canadian shareholders pay a 15% withholding tax on dividends from U.S. stocks. In most cases, if you hold the stocks outside your RRSP, you can get a Canadian income tax credit to offset that tax. If you hold U.S. or foreign stocks in an RRSP, the withholding tax doesn’t apply.
However, note that if you hold U.S. stocks in a TFSA, you can’t get back the withholding tax.
That doesn’t mean you can’t hold U.S. stocks in a TFSA—but you’ll want to hold U.S. dividend payers outside your TFSA—and hold U.S. non-dividend payers (or low payers) inside your TFSA.
It’s very difficult to navigate your website. It’s cluttered up with promotional offers and gimmicks. It’s like looking for 1 letter on the mail that has arrived along with 20 pieces of junk mail. You should dial back the self promotion and BS.
Thanks for your comments. We are continually upgrading and streamlining our website—and we appreciate your feedback.