Category Archives: TFSA Tax-Free Savings Account

5 TFSA Investment Tips

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.

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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.

TFSA Limit Increased to $10,000 and What it Means to Investors

TFSA Limit Increased from $5,500 to $10,000

Update April 27, 2015: The Canadian government published an official news release that Canadians can immediately take advantage of the proposed $10,000 Tax-Free Savings Account contribution limit.
Update April 23, 2015: The budget bill has not passed yet and must be passed in order for the TFSA increase to be approved and become law. So, I’d wait for Canada Revenue Agency’s Tax-Free Savings Account page to be updated before contributing that $4,500 amount.

If you were at least 18 years old back in 2009, and you have never contributed to a TFSA, you would have accumulated $41,000 contribution room.

Each year from 2009 to 2012 allowed for $5,000 contribution room.
Each year from 2013 to 2014 allowed for $5,500 contribution room.
This year started off with a contribution room of $5,500, until the announcement on April 21, 2015, that it as now be raised to $10,000. Going forward, each year, there will be $10,000 TFSA contribution room until further notice.

$10,000 maybe a lot for some people, and not everyone have the extra cash to invest that much. But we all need to start somewhere.

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Look within yourself and learn from experience to discover your unique investing style. Are you the type to put away a set amount every month, dollar-cost averaging, say $500 into the market via an ETF? One could do the same with individual stocks, except you might want to accumulate at least $1000 before investing to keep costs low. Banks typically charge $10 for each trade, which is about a 1% cost.

You Don’t Have to Invest $10,000 All At Once

There’s no one forcing you to contribute the $10,000, but any gains you get from a TFSA is tax-free, so it’d be illogical not to use it.

If you plan to put some funds in interest-producing vehicles, you can put that in a TFSA since interests are fully-taxed in the non-registered account. However, you’ll have to decide whether you save more taxes by placing interest-producing vehicles into a TFSA or if you put ETFs or stocks in a TFSA.

Of course, you can always create multiple TFSAs for the different types of investments. Just remember that the total contribution amount is still $10,000 for the year. Read More

Investing in the Tax-Free Savings Account

In a previous article, I wrote an introduction on the Tax-Free Savings Account (TFSA). In that article, I talked about who is eligible for the TFSA, what are the benefits, and how contributions and withdrawals work in the Tax-Free Savings Account. This article follows up with using the Tax-Free Savings Account as an investment tool.

Which Investments are Best Placed in the Tax-Free Savings Account?

A) Tax-Advantaged Consideration

If you place money in high interest savings accounts, bonds, and GICs, you should place those in a Tax-Free Savings Account first. Interests earned are taxed at the marginal tax rate. On the other hand, capital gains for stocks are taxed more favorably. Canadian eligible dividends are also taxed more favorably.

For US stocks, there’s generally 15% withholding tax applied to its dividends. If you have those stocks in the Tax-Free Savings Account, you can’t get the withholding tax back. That said, some investors argue that it’s still better to place US stocks in the Tax-Free Savings Account versus a non-registered account. In a non-registered account, you end up paying your marginal tax-rate for the foreign US dividends. Most of the time, the marginal tax rate is higher than the 15% withholding tax rate.
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