The Tax Free Savings Account (TFSA) is a great tool for Canadians to save and invest. So, it saddens me to find out that only one in five Canadians maxed out their TFSA. Perhaps people simply do not know what to do with it.
TFSAs can hold cash, mutual funds, exchange traded funds (ETFs), stocks, guaranteed investment certificates (GICs), and bonds. First, create a TFSA with your bank to hold the kind of savings or investments that you’re comfortable with. Then, you can start earning tax-free interests, income, and growth for your lifetime!
There are lots of books out there to help you take advantage of TFSAs, including Gordon Pape’s Tax-Free Savings Accounts: How to Profit from the New TFSA Rules and The Ultimate TFSA Guide: Strategies For Building A Tax-free Fortune.
Books take longer to read, so here are 5 quick TFSA investment tips to get you started in securing your financial future and reducing your taxes.
Shelter Dividend Stocks in a TFSA
I start the discussion with holding dividend stocks in a TFSA even though eligible Canadian dividends are taxed favorably in a non-registered account because dividend stocks generally experience higher growth than interest-producing vehicles (that will be discussed at Tip 4).
Imagine you can get tax-free income from a blue chip dividend growth company such as Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) that has been paying dividends for 183 years. The bank actually started paying dividends 35 years before Canada was founded!
At $58 per share, you can start earning a yield of 4.8% from Bank of Nova Scotia. That is, if you invest $5000 at that price, you will receive at least $240 in income every year. That 4.8% yield beats the 2% interest rate that most savings accounts are paying.
What’s more to like is that Bank of Nova Scotia tends to increase its dividends every year, so your income will likely continue to grow year after year. There are other stocks just like Bank of Nova Scotia so that you can build a portfolio of solid blue chips to start generating passive income.
A TFSA will not only shelter your dividend income, but also the growth from the dividend stocks as well. There’s no reason not to use a TFSA.