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Top 3 Mistakes You’re Making With Your TFSA

Wealth advisors say Canadians who don’t properly invest the money in their TFSAs could be losing out on long-term tax savings.

Tax-free savings accounts took the Canadian personal finance world by storm when they were first introduced in 2009.

Money invested in the account is allowed to grow tax-free, making it a popular option for many Canadians.

The latest data available from Statistics Canada shows that more than 15.3 million Canadians had TFSAs as of the 2019 tax year.

However, this tax-sheltered account is only as useful as someone who builds it. Yahoo Finance Canada WebMD asked three financial experts from across the country about the biggest mistakes Canadians are making with their TFSAs.

not depositing money in account

The word ‘savings’ in the account name can alter some individuals’ perception of what the account should be used for, says Mia Karmelik, an executive financial advisor at IG Wealth Management in Toronto.

“The TFSA account is often advertised as a savings account, leading many to use it as a real bank savings account to hold cash and GICs, rather than invest in the market,” he added. “

She further adds that TFSAs can hold a variety of investments such as stocks, bonds, mutual funds and exchange-traded funds, which can generate huge tax savings compared to keeping cold hard cash in the account.

“I would suggest that the money within the TFSA be invested in a diversified portfolio according to an individual’s risk tolerance, while keeping a long-term investment horizon in mind,” Karmelik said.

saving for short term goals

Opportunity cost, or the risk of missing out on potential gains when choosing one investment over another, is a big issue for Canadians, says Aleem Dhanaji, a senior financial planner at Asante Financial Management, who treats their TFSAs as short-term savings accounts. . Vancouver.

“To take full advantage of the TFSA, I would recommend maxing out your contributions each year and investing for the long term,” he added.

“If you use your TFSA like a regular savings account and only hold cash or cash equivalents, you may be missing out on long-term investment opportunities.”

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High interest savings accounts, which offer a higher rate of interest than typical savings accounts, or GICs, which offer returns on cash with very little risk, are a better option for short-term savings goals, says Dhanaji. Depends on the individual’s unique financial situation. Situation.

Losing Track of the Contribution Room

The 2023 contribution limit increases by $6,500, bringing the total contribution limit to $88,000 (if you’ve never contributed to a TFSA before).

The good news is that contribution room accumulates each year, but investors need to be extra careful about their contribution limits, especially if they took money out in the current year or have multiple TFSAs.

“The reality is that many people have added money over the years, withdrawn it, and opened accounts at various institutions – so calculating your TFSA room has now become like solving a quadratic equation,” says the Calgary-based financial advisor. Callie Boisvert Raymond James said.

She reminds investors who max out their contributions in a given year and then withdraw money will have to wait until the following year to add back that contribution room.

“Let’s say you withdrew $8,000 last year. When January 2023 arrives, you not only have an additional $6,500 annual room that all Canadian residents age 18 and older receive, You also get an $8,000 contribution room, which adds to your total room (withdrawals) as well,” he said.

Exceeding your available contribution limit in a given year may result in a penalty of one percent per month on the excess amount until it is withdrawn. In some cases, the Canada Revenue Agency may waive the penalty for early withdrawal of excess contributions.

“If you’ve been keeping an up-to-date spreadsheet of every deposit and withdrawal from your TFSA(s) for years, kudos to you! But for most people who didn’t realize it could get complicated, worry Don’t, all hope is not lost,” Boisvert said.

The best place to verify the contribution room is MyAccount on the CRA website, but she cautions that money coming in and going out of the account over the past year may not show up until late February.

“To feel confident about managing your TFSA room, I suggest using a combination of tracking your deposits and withdrawals and verifying them with the numbers reported by the CRA. To keep it simple, Consider having only one TFSA account instead of multiple accounts at different firms,” ​​she said.

Michelle Zadikian is a Senior Reporter with Yahoo Finance Canada. follow him on twitter @m_zadikian,

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