TFSA – 5 Mistakes to Avoid

While a TFSA is a popular registered account with most Canadians, many are not using it to its potential. Avoid these 5 most common mistakes and make the most of this versatile account!

1. Prioritizing Non-Registered Investments Before Maxing Out Your TFSA – Investing in non-registered accounts before maximizing your TFSA can cost you unnecessary taxes. Gains and income in your non-registered investments are fully taxable while TFSA growth is tax-free. Maximize your TFSA contribution before you open any non-registered investments. Optimize you tax-savings first!
2. Treating Your TFSA Like a Regular Savings Account – Keeping cash in your TFSA means missing out on the account’s true benefits. While it’s called a “Savings Account,” the TFSA is designed for investing, not just saving. Cash in a TFSA earns little interest, even in a high-interest savings account. Consider investing in stocks, ETFs, or mutual funds, within your risk tolerance to take advantage of tax-free compounding and higher long-term returns.
3. Overcontributing and facing penalties – If you overcontribute beyond your available contribution room, you will incur penalties up to 1% of the overcontributed amount per month, until you withdraw the amount. Your contribution room is cumulative and increases each year, but it’s essential to track your own contributions and withdrawals, as CRA records may not always be up to date.
4. Recontributing Withdrawals in the Same Year – Withdrawals from your TFSA increase your contribution room, but only in the following calendar year. If you withdraw and then redeposit the same amount in the same year, you risk overcontributing and incurring penalties. Remember, overcontribution means you incur 1% penalties.
5. Waiting for a windfall to start investing – Investing is for everyone! Start small, start now with any amount you can – and keep at it. Regular, automated contributions—even small ones—add up over time and take advantage of dollar-cost averaging. Stay disciplined and grow your TFSA steadily, regardless of market conditions or your current savings. If you do not understand investing, use an advisor to help with your goals – but don’t let anyone tell you that you need to have substantial savings to invest.

Bonus Tip: Designate a Successor Holder (Not Just a Beneficiary)

• If you have a spouse or common-law partner, list them as a successor holder rather than a beneficiary. This allows them to take over your TFSA seamlessly and continue enjoying tax-free growth, rather than having the account closed and the assets potentially taxed.