Avoid This TFSA Mistake at All Costs in 2020

TFSAs are an incredible tool, but they’re not without flaws. Don’t commit this costly TFSA mistake in 2020.

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

TFSAs can permanently protect your portfolio from taxes. This is an opportunity you shouldn’t pass up.

But TFSAs aren’t foolproof. If you’re not careful, the Canada Revenue Agency could even start taxing your account.

The biggest mistake that Canadians make is one of this simplest: they invest in the wrong securities. With unlimited tax protections, TFSAs are better suited for some investments over others.

Don’t commit this sin

Do you think 1% matters? Over long periods of time, a simple percentage can change your life.

Here’s a powerful example. The TFSA contribution maximum for 2020 is set at $6,000. Let’s say you opt to hit this maximum for 30 years. That’s quite a feat! What would all that saving amount to?

If you earned 7% annual returns, your nest egg would grow to $606,000. Not bad, but what if you only earned 6% annual returns? Surely the gap couldn’t be very big, right? Not so. Earning 6% per year would grow your capital to just $503,000. A 1% difference lost you more than $100,000!

The magic of compound interest is hard to overstate. When invested for decades, or even just a handful of years, every bit counts.

That brings us to the worst mistake that TFSA holders make: investing in cash. Millions of Canadians at this very moment hold cash in their TFSAs. This is an outright travesty. Most cash balances accrue interest at just 1% or 2% per year. Some accounts pay nothing at all.

With a long enough time frame, your best bet is nearly always to own a diversified portfolio that includes higher-returning securities like stocks, but even risk-averse investors should ditch cash.

Your low-risk options are endless. iShares Core Canadian Short Term Bond Index ETF, for example, has delivered annual returns of 3.9% since inception with almost no volatility. Meanwhile, Vanguard Canadian Short-Term Corporate Bond Index ETF yields 2.7% in annual interest. These rates of return aren’t breaking the bank, but they beat owning cash.

Your best bet

If a 1% difference can make a dramatic different for your portfolio, what about 5%? In the previous example, we invested the TFSA annual contribution maximum of $6,000 for 30 years. At a 7% interest rate, you’d wind up with $606,000.

What if you invested in cash? Earning 2% annual returns would shrink your eventual capital to just $248,000. Even if you earned 3% annual returns with a bond ETF, you’d only wind up with $294,000. That’s a difference of more than $300,000.

As mentioned, when it comes to compound interest, every bit matters. That’s because as interest builds year after year, gains start to be exponential.

If you have an investing time horizon of at least a few years, it pay offs to take on more risk. If you’re investing for a decade or longer, there’s zero reason to own any cash in your TFSA. Get as much as you can invested in long-term stocks that can compound your capital at attractive rates.

Should you invest $1,000 in Vermilion Energy right now?

Before you buy stock in Vermilion Energy, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Vermilion Energy wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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. 

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

A shopper makes purchases from an online store.
Tech Stocks

Buy the Dip on the Return of Recession Stocks?

If a recession comes back, there are some stocks that could fair well afterwards. And this is one of the…

Read more »

RRSP Canadian Registered Retirement Savings Plan concept
Retirement

Here’s the Average Canadian TFSA and RRSP at Age 60

Many Canadian retirees have tens of thousands invested in ETFs like the iShares S&P/TSX 60 Index Fund (TSX:XIU).

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Here’s Exactly How a $20,000 TFSA Could Potentially Grow to $200,000

Index funds like the iShares S&P/TSX Capped Composite Index (TSX:XIC) are tax free in a TFSA.

Read more »

dividend growth for passive income
Investing

5 Canadian Growth Stocks to Buy and Hold for the Next 15 Years

These Canadian stocks have tremendous long-term growth potential, making them five of the best investments you can buy and hold…

Read more »

Man holds Canadian dollars in differing amounts
Stocks for Beginners

Cash Is King? Think Again During Today’s Market Dip

Sure, cash is great, but during a market dip investors may want to consider using some of the cash to…

Read more »

grow money, wealth build
Stocks for Beginners

How I’d Build a $15,000 Portfolio for Income and Growth With Canadian Value Stocks

Looking for some Canadian value stocks to buy without breaking the bank? Here's a trio to consider buying this month.

Read more »

Dividend Stocks

How I’d Invest $6,000 in Canadian Real Estate Stocks to Build Lasting Wealth

Canadian REITs on sale! See how grocery-anchored retail properties offering 9% yields could turn $6,000 into lasting wealth despite US…

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Investing

3 Canadian Value Stocks I’d Hold in My TFSA Through Market Volatility

Given their healthy growth prospects and discounted stock prices, these three value stocks would be ideal additions to your TFSA.

Read more »