Learning about TFSA rules and regulations can help you decide where to put your money—and what stocks to buy

Understanding TFSA rules and regulations will help guide you into choosing when a TFSA is the best place to hold stocks at different points in your investing career

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.

TFSA rules and regulations include contribution limits. You can now contribute a maximum of $6,000 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.

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TFSA rules and regulations: Consider holding dividend-paying stocks outside of your TFSA

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 Canadian stocks and interest-paying instruments, you’ll want to hold the dividend payers outside of your TFSA.

Invest in your TFSA based on your current income level to get the biggest benefits in retirement

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.

Use lower-risk investments to profit more in TFSA investing

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.)

TFSA rules and regulations: Focus on investment quality for the best investing results

When we look for investments, we zero in on companies that have established a business and have at least some history of building revenue and cash flow. We also look for companies that stand to benefit as the economy continues to improve, and that have proven management and long-term growth plans. Those types of stocks are great additions to a TFSA.

That’s very different from so-called concept stocks, many of which are start-ups or companies that look to profit from next week’s or next year’s investor fad. These companies can generate big returns in a good year. In the long run, though, they are likely to cost you money.

Find the best stocks for your TFSA and build your well-diversified portfolio with our proven three-part Successful Investor approach

  1. Invest mainly in well-established, dividend-paying companies, with a history of rising sales if not earnings and dividends.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities.
  3. Downplay or avoid stocks in the broker/media limelight. When stocks spend time in the limelight, they tend to become overpriced, and this leaves them vulnerable to a sharp downturn on any hint of bad news. Instead, look for stocks with hidden value that are less widely recognized—at least so far—as attractive investments.

What kind of investments do you hold in your TFSA, and how have they worked for you?


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