Over 50% of Canadians Are Making This 1 Massive TFSA Mistake

TFSA can be a powerful investment tool if you use it right. With the right assets growing inside a TFSA, you can meet a lot of your short-term and long-term financial goals.

| More on:

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

When it comes to long-term investments and retirement savings, the first account that comes to most Canadians’ minds is the RRSP. It was created for that specific purpose, and it has stipulations to ensure that it’s used specifically for that one purpose. Its tax-deferred nature, a generous contribution limit, and tax-deductible contributions make it a powerful investment tool.

Yet, the relatively new TFSA has surpassed it in terms of popularity and usage. More people have a TFSA now than RRSP, and since its contribution limit is relatively modest, more people try to max out their TFSA before maxing out the RRSP. But the most attractive feature of the TFSA is that it’s accessible anytime, and you don’t have to wait till retirement to touch your TFSA funds.

Even with a lower contribution limit, TFSA (in many ways) is a more powerful investment tool than the RRSP, yet over 50% of Canadians are making a huge mistake in terms of their TFSAs.

Taking the name too literally

In the early days of the TFSA, the name “Tax-Free Savings Account” was a bit misleading. Many assumed that it was just another savings account and that they might not be able to put anything other than cash in that account. But that was about a decade ago. According to a study conducted by the Bank of Montreal, 38% of TFSAs have cash as the primary investment.

But even that’s not as bad as the TFSA perception problem that more than 50% of Canadians have. According to the study, about 51% of the respondents weren’t even aware that the TFSA can hold anything other than cash. It points to the painful underutilization of this great investment tool. Thanks to its tax-free nature and the fact that you can withdraw your TFSA funds whenever you want, it’s ideal for short-term financial goals.

And one amazing way to meet your short-term financial goals is by growing your savings because if you only rely on savings and interests, it might take you a very long time to save an adequate amount.

Leveraging growth stocks

Growth stocks like Goodfood Market (TSX:FOOD) can be an amazing way to grow your TFSA nest eggs at an expedited rate. It has a three-year compound annual growth rate (CAGR) of 67.2%; much of that is owed to the after-crash growth momentum that catapulted the valuation of several stocks significantly higher than their typical growth pace could.

Still, if we assume that the stock will keep growing at half this rate (33.6) for the next five years, it can convert just one year’s TFSA contributions to about $25,000. The same $6,000 would take a depressing 71 years to grow to $25,000 at a 2% growth rate (a bit higher than the best TFSA interest rates you might get). That’s the difference between the potential of investing in stocks and keeping your TFSA limited to cash.

Foolish takeaway

It’s important to point out that relatively few stocks show this high growth pace, and they come with their fair share of risk. But you can mitigate this risk by diversification and choosing fundamentally strong companies. You’d lose a bit of growth, but you will have a relatively safer portfolio, and your overall growth will likely be miles ahead of what you can get with just cash in your TFSA.

Should you invest $1,000 in Descartes Systems Group right now?

Before you buy stock in Descartes Systems Group, 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 Descartes Systems Group 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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Goodfood Market.

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 train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

a man relaxes with his feet on a pile of books
Investing

Got $7,000? How I’d Spread It Across 5 Blue-Chip Stocks for an Investing Foundation

Spreading $7,000 across these five blue-chip stocks provides a solid foundation for long-term financial success.

Read more »

The letters AI glowing on a circuit board processor.
Tech Stocks

How I’d Allocate $10,000 to AI Stocks in Today’s Market

Shopify (TSX:SHOP) is one of Canada's most compelling AI stocks.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Retirement

Top Canadian Value Stocks I’d Hold in My TFSA for the Next Decade

These Canadian value stocks have significant growth potential and will enhance your TFSA portfolio’s return in the long run.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »

rail train
Dividend Stocks

What to Know About Canadian Pacific Railway Stock for 2025

CP stock has now gone through a major merger, so what do investors have to look forward to?

Read more »

ways to boost income
Dividend Stocks

Top Canadian Value Stocks I’d Buy for Dividend Growth and Appreciation

If you are looking for income and capital appreciation, here are three Canadian value stocks for a great total return…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Canadian Stock to Buy With $2,000 Right Now

The company’s powerful combination of growth, income, and value, positions it well to deliver solid returns, making it a smart…

Read more »