CRA: Want to Retire Rich? Avoid These 2 Tricky Tax Traps

Invest in the Bank of Nova Scotia and hold it in your TFSA as you avoid these two tax traps so you can retire rich.

| More on:

Your Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) are excellent tools to save for your retirement. Both account types allow for better savings due to the tax advantages you can get from them. However, there are a couple of tricky tax mistakes that people tend to make.

Today I will discuss how you can avoid two tax traps with these accounts so you can make the most of your investments to retire as a wealthy investor.

Withdrawing early from your RRSP

One of the major mistakes people make with their RRSP is withdrawing from the account before retirement. This is generally considered a significant mistake that people make when they find themselves in hard times.

The RRSP allows you to grow your funds tax-free within the account. However, the funds are taxable when you withdraw. If you are still earning an income, the tax can be significant because it is based on your marginal rate. If you are earning a substantial annual salary figure, you could lose a major chunk of your RRSP balance between federal and provincial taxes.

Remaining invested in the RRSP until you retire can provide you with more substantial returns in the long run.

Not investing in the TFSA

According to a poll from the Royal Bank of Canada, 42% of Canadians have a substantial amount of cash sitting in their TFSAs. Using your TFSA to hold cash rather than using the contribution to invest is the second big mistake you need to avoid. You don’t have to pay taxes on the money in your TFSA, and you can let it grow tax-free. However, it creates a considerable opportunity cost.

No matter the interest rates, holding cash won’t allow you to take full advantage of the TFSA’s tax-sheltered status. All interest payments, capital gains, and dividends received in a TFSA are tax-free as long as you remain invested.

If you use the contribution room to hold an income-generating asset, you can get far greater returns than relying on interest returns for the cash equivalent amount.

A stock to consider

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is an excellent stock that you can consider adding to your TFSA portfolio to leverage its tax-sheltered status. BNS is Canada’s third-largest bank in terms of its market capitalization. The company has invested billions of dollars in the last decade to expand its exposure to international markets.

It focused much of its growth in Peru, Mexico, Chile, and Columbia. All four countries took massive hits amid the pandemic, like most countries worldwide. While it may have impacted short-term earnings for the bank, BNS has a promising long-term outlook. Despite the short-term troubles, BNS remains a profitable investment for its shareholders.

Foolish takeaway

The stock is trading for $61.48 per share, and is paying its investors at a juicy 5.86% dividend yield at writing. It is still at a 16.54% discount on a year-to-date basis. Scotiabank could make an excellent investment for investors who are looking to capitalize on the tax-sheltered status of their TFSA.

Try to avoid making the RRSP and TFSA mistakes that can result in significant losses for you in the long run. Additionally, you should consider using reliable dividend stocks like BNS to take full advantage of the tax-sheltered accounts.

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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends BANK OF NOVA SCOTIA.

More on Dividend Stocks

investment research
Dividend Stocks

Best Stock to Buy Right Now: TD Bank vs Manulife Financial?

TD and Manulife can both be interesting stock picks for today, depending on your investment style.

Read more »

A worker gives a business presentation.
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

These stocks are out of favour but could deliver nice returns over the coming years.

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

This 5.5 Percent Dividend Stock Pays Cash Every Month

This defensive retail REIT could be your ticket to high monthly income.

Read more »

Confused person shrugging
Dividend Stocks

Passive Income: How Much Do You Need to Invest to Make $600 Per Month?

Do you want passive income coming in every single month? Here's how to make it and a top dividend ETF…

Read more »

Canadian Dollars bills
Dividend Stocks

3 Monthly-Paying Dividend Stocks to Boost Your Passive Income

Given their healthy cash flows and high yields, these three monthly-paying dividend stocks could boost your passive income.

Read more »

Make a choice, path to success, sign
Dividend Stocks

The TFSA Blueprint to Generate $3,695.48 in Yearly Passive Income

The blueprint to generate yearly passive income in a TFSA is to maximize the contribution limits.

Read more »

hand stacks coins
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Can Buy and Hold for a Decade

These three high-yield dividend stocks still have some work to do, but each are in steady areas that are only…

Read more »

senior man and woman stretch their legs on yoga mats outside
Dividend Stocks

TFSA: 2 Canadian Stocks to Buy and Hold Forever

Here are 2 TFSA-worthy Canadian stocks. Which one is a good buy for your TFSA today?

Read more »