Canada launched the Tax-Free Savings Account (TFSA) all the way back in January 2009. At the time, the maximum cumulative contribution room in the TFSA stood at $5,000. Over a decade later, and the cumulative contribution room in a TFSA is $75,500. That is a lot more to work with in the early 2020s.
Today, I want to look at three great tips that Canadians should remember for their TFSA. Let’s jump in.
Beware of overcontributions
This June, the Canada Revenue Agency (CRA) revealed that many Canadians made the mistake of overcontributing during the pandemic. The CRA says that it can waive a penalty fee if it is the result of a “reasonable error”. Of course, this is determined by internal guidelines that are constantly reviewed.
Instead of relying on an unpredictable system, Canadians need to take care in this area. If you have a CRA online account, you can always check your TFSA status through your profile.
Don’t sit on cash in your TFSA
Every year, studies from major financial institutions suggest that many Canadians sit on large cash amounts in their TFSA. Average savings rates for Canadians increased during the pandemic. Unfortunately, Canadians are not putting this cash to work if they simply park it in their TFSA. This is especially true in the face of rising inflation. The TFSA is a remarkable vehicle for capital growth and income. Do not squander its best qualities by using it as a mere piggy bank.
Watch out for foreign dividend stocks
Unlike the RRSP, foreign dividend stocks held in a TFSA are subject to withholding tax. This means that a non-registered account is usually the best fit for foreign dividend stocks. Holding these investments in a TFSA can strip away the tax-free benefits of the account.
