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September 10, 2024|by Scott Clayton
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What are the best TFSA investments?
The best TFSA investments provide you with tax advantages, but market volatility 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.
What are the best TFSA investment options for maximizing long-term growth?
For investors seeking to maximize long-term growth in their TFSAs, a diversified portfolio of low-cost Canadian and global equity index ETFs, such as those tracking the S&P/TSX Composite Index and MSCI World Index, is generally considered one of the most effective strategies.
Your TFSA can generally hold the same investments as an RRSP. That means the TFSA best investments 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.
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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. These are some of the TFSA best investments for long-term growth.
What is the best TFSA investment strategy?
The best TFSA investment strategy typically involves consistently contributing the maximum allowable amount to a diversified portfolio of low-cost, broad-market index ETFs aligned with your risk tolerance and investment horizon, while minimizing fees and maximizing tax-free compound growth over the long term.
When you are first starting out with your TFSA, or making small monthly contributions, low-fee index funds are among the TFSA best investments.
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.
Are blue chip stocks and dividend-paying stocks good TFSA investments?
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.
Should I consider actively managed funds or stick to passive index funds within my TFSA?
For most TFSA investors, sticking to low-cost passive index funds is generally recommended due to their lower fees, broader diversification, and consistent long-term performance compared to the majority of actively managed funds.
How can I balance risk and reward in my TFSA portfolio to achieve maximum gains?
To balance risk and reward for maximum TFSA gains, create a diversified portfolio of low-cost index ETFs covering various asset classes and geographies, with an asset allocation that matches your risk tolerance and investment timeline, and rebalance periodically.
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 are the best practices for maximizing TFSA contributions and utilizing any unused contribution room?
To maximize TFSA contributions and effectively utilize unused contribution room, consider the following best practices:
- Contribute the annual maximum: Try to contribute the full annual amount allowed each year. For 2024, the contribution limit is $7,000.
- Contribute early in the year: Make your contribution as early as possible, ideally in January, to maximize tax-free growth throughout the year.
- Track your contribution room carefully: Keep detailed records of your contributions and withdrawals. The CRA provides this information, but it may not always be up to date.
- Utilize unused room from previous years: If you haven’t maxed out your TFSA in past years, you can contribute that unused room at any time. This cumulative room grows each year you’re eligible, even if you haven’t opened a TFSA yet.
- Catch up on unused room when possible: If you have a windfall or extra savings, consider using it to fill up any unused contribution room from previous years.
- Consider in-kind transfers: If you have investments in non-registered accounts, you can transfer them “in-kind” to your TFSA to utilize large amounts of unused room. Be aware this may trigger capital gains taxes.
- Reinvest TFSA withdrawals strategically: Remember that withdrawals from your TFSA are added to your contribution room, but not until the next calendar year. Plan large withdrawals and re-contributions accordingly.
- Use a spousal contribution strategy: If you’ve maxed out your TFSA but your spouse hasn’t, consider giving them money to contribute to their TFSA (note that the attribution rules don’t apply to TFSAs).
- Prioritize TFSA over non-registered accounts: Generally, it’s beneficial to max out your TFSA before investing in non-registered accounts due to the tax-free growth.
- Be aware of over-contribution penalties: Exceeding your contribution limit can result in a 1% per month penalty on the excess amount. Always double-check your available room before contributing.
- Understand carry-forward rules: Unused contribution room is carried forward indefinitely. There’s no rush to use it all immediately if you don’t have the funds available.
In summary, Tax-Free Savings Accounts (TFSAs) offer Canadians a valuable opportunity to earn tax-free investment income. When considering the TFSA best investments, it’s important to focus on options that align with your financial goals and risk tolerance. For those just starting out or making small contributions, low-fee index funds and ETFs are often the best investments for TFSAs. As your account grows, transitioning to a diversified portfolio of conservative, dividend-paying stocks can be a smart move.
However, it’s crucial to remember that high-risk investments are generally not well-suited for TFSAs, as losses within the account cannot be used to offset capital gains outside the TFSA. Additionally, while dividend stocks can be among the TFSA best investments, they do not receive special tax treatment within the account.
Ultimately, the key to successful TFSA investing is to follow a disciplined, long-term strategy that emphasizes well-established companies spread across various economic sectors while avoiding chasing hot stocks in the media spotlight. By carefully selecting the best investments for TFSAs and staying the course, Canadians can make the most of this powerful savings vehicle and enjoy tax-free growth for years to come.
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 ?
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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 ?
DavidTSI Research
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.
Log in to ReplyDon
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.
Log in to ReplyTSI Research
Thanks for your comments. We are continually upgrading and streamlining our website—and we appreciate your feedback.
Log in to ReplyRichard
I always thought that BCE would be a strong suitable equity for our TFSAs but BCE trashed that when they thought that they would restructure. I am at a loss of -12 to -15% YTO throughout my entire portfolio. The 8 % plus dividend is great but total investment has shrunk immensely. I invested years ago in ATD and GOOG and they have performed nicely without a dividend to speak of. I want some growth in my portfolio as well.
Log in to ReplyScott
Thanks for your feedback!
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