A Tax-Free Savings Account (TFSA) helps accountholders build wealth over time, primarily; and save for big spending in the short term, secondly. You can achieve both objectives easily because money growth in a TFSA is tax-free.
Unfortunately, some users miss out on maximizing the tax-free features due to mistakes, commonly on contributions, withdrawals, and utilization. If repeated, these TFSA mistakes can be costly and run up to thousands. The following are some miscues, unintentional and deliberate, by users.
1. Not keeping track of contribution limits or available contribution room
The CRA sets annual dollar limits for the TFSA, and the golden rule is to stay with it and not overcontribute. A user pays a penalty tax per month equivalent to 1% of the “excess TFSA amount” or overcontribution. Your remedy in this instance is to pull out or withdraw the excess amount immediately.
Keep track of your contributions within a year. If unsure of your available contribution room, visit the CRA website to access your ‘My Account’ information.
2. Withdrawing and returning funds in the same year
Some TFSA users must remember that withdrawing funds and returning or depositing the same amount in the same year is an overcontribution. Be mindful that any amount withdrawn isn’t a deduction from your limit but forms part of the following year’s limit. As much as possible, leave income-producing assets intact and allow the capital to grow tax-free.
3. Day trading
The buying and selling of stocks or day trading to make quick profits raises red flags with the CRA. The tax agency will treat income (dividends, interest, gains) from active, frequent trading as business income, subject to regular taxation. As mentioned earlier, the TFSA isn’t a regular savings account but a wealth-builder.
No contribution deadline
The TFSA is ideal for long-term investors and retirees throughout the sunset years. Besides the tax-free features, there’s no deadline for contributions unlike the Registered Retirement Savings Plan (RRSP). Because there is a fresh limit in January, you can purchase more income-producing assets like dividend stocks yearly and hold them in your TFSA.
Anchor stock in a TFSA
The National Bank of Canada (TSX:NA) is also a good anchor stock for TFSA investors. This $33.9 billion bank doesn’t pay the highest dividend in the market, but the 4.23% yield is safe and at par with the industry average. If you need faster compounding of your TFSA balance, reinvest the quarterly dividends.
Canada’s sixth-largest bank has outperformed its larger peers in the last 10 years. At $100.13 per share, you get peace of mind and unhampered quarterly income. In fiscal 2023, net income declined by 1% to $3.3 billion versus fiscal 2022, although it rose 4% year over year to $768 million in Q4 fiscal 2023 compared to Q4 fiscal 2022.
Its President and CEO, Laurent Ferreira, said the bank will maintain a defensive posture in 2024 as long as the outlook for economic growth is challenging. However, he is confident about NA’s earnings power due to a diversified business mix and the ability to create sustainable long-term shareholder value.
Familiarity and compliance
The Canada Revenue Agency (CRA) expects TFSA users, particularly investors, to be familiar with the rules and comply to be problem-free.
