3 TFSA Mistakes Millions of Canadians Are Still Making

Millions of Canadians leave money on the table by making classic mistakes with their TFSAs. If you want to maximize your portfolio’s value, keep these lessons in mind.

Do you have a TFSA? If you do, you’re already doing better than the two-thirds of Canadians who haven’t set one up yet.

But having a TFSA is only the first step. After creating a TFSA, millions of Canadians still leave money on the table by making a few classic mistakes.

If you want to make the most of your TFSA and boost your odds of retiring rich, be sure to avoid the self-imposed mistakes outlined below.

Investing in cash

For some reason, a tonne of TFSA assets are invested in cash. This is perhaps the worst mistake you can make. You don’t necessarily have to have 100% of your money in stocks, but there are certainly better options than cash.

For example, several short-term bond funds are delivering annual income streams of around 3%. Because these funds only invest in short duration bonds, they’re largely insulated from swings in interest rates. Plus, because they’re stashed in a TFSA, they’re completely protected from taxes.

If you have a multi-year time horizon, your best bet is still to invest in a diversified portfolio, complete with a sizable equity allocation. But if you have near-term needs or just want to remain conservative, choose low-risk bond funds instead of cash. After all, even a 3% interest rate is better than a 2% interest rate.

Not catching up

Few Canadians are able to meet their annual maximum contribution limit, which this year is set at $6,000. Even fewer Canadians ever meet their cumulative contribution maximum.

If you put $6,000 into your TFSA this year, that’s incredible, but you should know that you likely have even more room to invest. That’s because any unused contribution room from previous years rolls forward. This is a huge lesson to learn: you can’t lose your TFSA contribution room!

In total, you’re allowed to contribute $63,500 to your TFSA. That’s the sum of every year’s contribution limit since the TFSA was created. If you ever withdrew money from a TFSA, that also opens additional contribution space. Work hard to meet your annual contribution max, but never forget that your real maximum is much higher.

Mixing priorities

A TFSA is technically a “savings account,” but you can invest in anything you’d like. Due to its tax-free status, many investors are urged to invest in dividend stocks. These stocks pay monthly or quarterly cash to shareholders simply for owning the stock. Often, you can earn a 3%, 5%, or even a 7% dividend every year.

Owning dividend stocks certainly isn’t a poor choice, but it often prevents you from owning high-growth companies. These companies prefer to keep the cash for themselves in order to reinvest it back into the business at an attractive rate. The capital gains you can earn from these stocks can often outpace the income that dividend stocks produce.

It doesn’t matter if you make your money with dividends or capital gains: both are tax free. If you have a long-term time horizon, don’t be persuaded into dividend stocks purely for the tax benefits. Stocks that don’t pay dividends have just as much upside, if not more, and are similarly protected from taxes.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Vanzo has no position in any stocks mentioned. 

More on Investing

Man data analyze
Tech Stocks

3 Reasons Celestica Stock Is a Screaming Buy Now

These three reasons make Celestica stock a screaming buy for long-term investors.

Read more »

profit rises over time
Dividend Stocks

These 2 Dow Stocks Are Set to Soar in 2025 and Beyond

Two Dow Jones stocks are screaming buys but Canadians must hold them in an RRSP or RRIF to avoid paying…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How to Use Your TFSA to Earn Ultimate Passive Income

If you have a TFSA, then you have the key to creating ultimate passive income. All you need is a…

Read more »

Confused person shrugging
Dividend Stocks

Better Buy: Fortis Stock or Hydro One Stock?

Let's do a compare and contrast of these two top utilities stocks right now, shall we?

Read more »

A close up color image of a small green plant sprouting out of a pile of Canadian dollar coins "loonies."
Dividend Stocks

Boost Your Passive Income: 2 Canadian High-Yielders at a Bargain

Nutrien (TSX:NTR) stock and another play that appear like fantastic dividend bargains in mid-November.

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Metals and Mining Stocks

Invest $7,000 in This Dividend Stock for $672 in Passive Income

High yield can be an essential requirement when you need to start even a modestly sized passive income with a…

Read more »

telehealth stocks
Tech Stocks

Well Health Stock: Buy, Sell, or Hold?

Another record-breaking quarter and strong demand sets the stage for continued momentum for Well Health stock.

Read more »

3 colorful arrows racing straight up on a black background.
Dividend Stocks

TSX Stocks Soaring Higher With No Signs of Slowing

Three TSX stocks continue to beat the market and could soar higher in an improving investment landscape.

Read more »