Many Canadians have been pushed into a difficult financial position due to the COVID-19 pandemic. Now is the time to use every tool at your disposal. Today, I want to go over three tips that can help you invest with your Tax-Free Savings Account (TFSA).
Do not over-contribute
This is a big one to remember. The cumulative contribution room in a TFSA in 2020 is $69,500, at least for those who were eligible to contribute when it was launched in 2009. Those who go over this threshold will be subject to a penalty tax of 1% per month. This can really add up over a long period of time.
Avoid using your TFSA as a savings account
At the end of the previous decade several surveys showed that many TFSA-holders were still holding primarily cash in their accounts. This was after one of the longest bull-runs in market history. The TFSA is a fantastic vehicle for capital growth and income. Investors who use the TFSA as a cash account are failing to take advantage of what the TFSA has to offer. Even a very conservative portfolio is more productive than this strategy.
Don’t hold U.S. dividend stocks
It can be tempting to hold U.S.-listed dividend stocks. However, Canadians should avoid stashing these in their TFSA. The U.S. Internal Revenue Service (IRS) levies a withholding tax of 15% on dividend paid to Canadian resident investors. This means that a U.S. dividend stock is going to claw back on those tax-free gains that investors crave. Target Canadian dividend stocks instead, which will pay you tax-free income.
