As a new TFSA (Tax-Free Savings Account) investor, it’s your job to know the rules so you won’t run into financial hot water at a later date. Indeed, you should inform yourself so you’ll not only steer clear of penalties from the CRA (Canada Revenue Agency) but also use it effectively to grow your wealth over the course of many years.
Indeed, the TFSA may be used as a place to park cash in a high-interest savings account. However, if you’re young and don’t expect to retire in the ballpark of three to five years, I think it makes the most sense to invest TFSA funds in the shares of quality companies for the long term. By long term, I mean a timespan of five years at a minimum. Ideally, it’d be nice to hold shares of a core TFSA holding for 10 years or more.
In this piece, we’ll look at one great blue chip that I think would make for a fine buy for any long-term-focused TFSA fund. But first, we’ll have a look at three mistakes that smart TFSA investors tend to steer clear of. Making such mistakes can prove quite costly. As such, it’s important to ensure you’re not at risk of skating offside at any point in time!
Without further ado, let’s look into the three mistakes, so TFSA investors can position themselves in a way to never make them.
Mistake #1: Exceeding one’s TFSA contribution limit is a careless mistake that could cost one dearly
The first mistake is perhaps the easiest one for many new TFSA investors to make. It’s your job, not the CRA’s, to ensure you don’t contribute more than you’re allowed to. While you could check the CRA website to see how the maximum amount you personally are allowed to contribute at any given time, I’d argue that it’s a far better idea to keep tabs on your contributions over the years.
That way, you don’t need to rely on the CRA website being completely up to date at any given time. Keep tabs on how much space you have and be aware of the annual contribution limits. For 2024, it’s been hiked to $7,000 from $6,500.
In any case, overcontributing can incur ugly financial penalties that could take away from your long-term TFSA goals.
So, rule number one for smart TFSA investors: Know your TFSA contribution limit and ensure you stay within it!
Mistake #2: Keeping it all in savings (especially if you’re a young TFSA investor)
Another mistake for young TFSA investors is keeping all of one’s funds in cash. Indeed, it’s called a Tax-Free Savings Account, but you can and should invest in quality stocks to score a better long-term return. Of course, holding cash makes sense if you’re looking at making a big purchase at some point over the near- or medium-term.
However, if you don’t intend on using up the TFSA funds in the next five years, it makes sense to look at a wonderful, low-cost dividend play like CIBC, a Canadian bank that could help level up your TFSA over cash!
Mistake #3: Daytrading with your TFSA funds
Finally, it’s a horrible idea to trade with your TFSA. Even if you make a great deal from getting in and out of stocks, you could be on the hook to pay taxes. It’s at the discretion of the CRA, so why not play it safe and invest for the long term?
When it comes to blue chips like CIBC, you’ll probably want to hold for decades at a time. It has a 5.84% dividend yield to keep you hanging in. Additionally, the banking scene is rich with value and could enjoy some capital gains after a rough few years.
Long-term investing beats day trading in a TFSA all day long. Day trading is not only overly risky for new investors, but it can incur a trip to the penalty box if you use TFSA funds.
