DANGER: One Wrong Move Could Wipe Out 50% of Your RRSP or TFSA!

If you want to avoid a surprise 50% tax on your RRSP or TFSA, hold approved investments like the iShares S&P/TSX 60 Index Fund (TSX:XIU)

| More on:

Did you know that one wrong move is all it takes to wipe out half of your RRSP or TFSA?

While it may not be common knowledge, it’s true.

There are several ways to get taxed in either an RRSP or TFSA, but there’s one mistake common to both of them that will hit you with a 50% tax on your holdings.

Although it’s not likely you’d ever make this mistake by accident, it could happen, and if it does, you’ll be taxed far more heavily than you ever would be in a non-registered account.

Holding prohibited investments

If you hold non-qualified investments in your RRSP or TFSA, you’ll be taxed a whopping 50% of their fair value.

Prohibited investments for RRSPs and TFSAs generally include shares in companies you control or influence. Shares in a private company you run would be prohibited; a small stake in a company where you have influence over management might be, too.

You might think that neither of these conditions could ever apply to you, but it’s still a good idea to err on the side of caution when picking RRSP and TFSA investments.

One easy solution

If you’re concerned about getting hit with a massive tax for prohibited RRSP or TFSA investments, there’s one simple solution:

Invest in ETFs.

ETFs are some of the most common investments in registered plans, and are generally accepted in both RRSPs and TFSAs. By holding ETFs in your registered plans, you avoid the possibility of direct share ownership in a company you don’t deal with at arm’s length.

One solid ETF for Canadian investors is the iShares S&P/TSX 60 Index ETF (TSX:XIU).

A diversified index fund consisting of the largest 60 TSX stocks, it has it all: diversification, low fees, dividend income, and more.

The 60 stocks that make up XIU’s portfolio are the largest publicly traded Canadian companies, meaning that the fund is composed of relatively safe blue chips. This, along with the fund’s considerable diversification, helps minimize risk.

The fund also has low management fees, which helps you keep your returns. With funds in general, hidden management fees are a huge concern–a major drain on performance that can eat into your returns. XIU’s MER is low, at 0.18%, so you don’t need to worry about expenses killing your gains.

Finally, with a dividend yield of about 2.8% based on current prices, the fund produces a fairly solid amount of income. This is all thanks to the fact that the fund invests in Canadian large caps, which are well known for producing solid dividends.

With XIU’s 2.8% dividend yield, you’d generate about $2,800 a year with just $100,000 invested. The yield-on-cost could increase over time if the stocks that make up the fund increase their payouts.

If you want to make sure that your RRSP and TFSA holdings are on the level, XIU is exactly the type of fund you should consider. Diversified, safe and high in income, it’s exactly the type of investment that registered accounts were designed to hold.

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 Andrew Button owns shares of iSHARES SP TSX 60 INDEX FUND.

More on Dividend Stocks

woman retiree on computer
Dividend Stocks

1 Reliable Dividend Stock for the Ultimate Retirement Income Stream

This TSX stock has given investors a dividend increase every year for decades.

Read more »

calculate and analyze stock
Dividend Stocks

8.7% Dividend Yield: Is KP Tissue Stock a Good Buy?

This top TSX stock is certainly one to consider for that dividend yield, but is that dividend safe given the…

Read more »

grow money, wealth build
Dividend Stocks

TELUS Stock Has a Nice Yield, But This Dividend Stock Looks Safer

TELUS stock certainly has a shiny dividend, but the dividend stock simply doesn't look as stable as this other high-yielding…

Read more »

profit rises over time
Dividend Stocks

A Dividend Giant I’d Buy Over TD Stock Right Now

TD stock has long been one of the top dividend stocks for investors to consider, but that's simply no longer…

Read more »

analyze data
Dividend Stocks

Top Financial Sector Stocks for Canadian Investors in 2025

From undervalued to powerfully bullish, quite a few financial stocks might be promising prospects for the coming year.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

3 TFSA Red Flags Every Canadian Investor Should Know

Day trading in a TFSA is a red flag. Hold index funds like the Vanguard S&P 500 Index Fund (TSX:VFV)…

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

1 Magnificent Canadian Stock Down 15% to Buy and Hold Forever

Magna stock has had a rough few years, but with shares down 15% in the last year (though it's recently…

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

Earn Steady Monthly Income With These 2 Rock-Solid Dividend Stocks

Despite looming economic and geopolitical uncertainties, these two Canadian monthly dividend stocks could help you generate reliable income in 2025…

Read more »