3 Mistakes to Avoid in Your TFSA
A large majority of Canadian investors contribute to TFSAs. Overall, these plans can be a great way to save for retirement, but some investors make costly mistakes when contributing to these accounts. For instance, exceeding your contribution limit will result in a penalty. Carefully track all transactions in your TFSA, including deposits and withdrawals, so you do not exceed the contribution limit. It is also important to choose your investments in these accounts wisely.
- Excess contributions are charged a 1 percent per month penalty (for any amount over your total TFSA limit) until you withdraw the funds in excess.
- It is best to avoid U.S. stocks that pay a dividend. This is because you cannot claim the non-residents’ withholding tax of 15 percent on these dividends. Instead, it’s better to hold these types of investments in an RRSP where you won’t have to pay a withholding tax on your U.S. dividends.
- Rather than holding cash which have very low returns in a TFSA account, invest in stocks to achieve better tax-free returns.
“Be careful not to exceed the contribution limit in your TFSA. Many people go over their TFSA contribution limit without knowing it, and it is very costly.”