WARNING: 3 Costly Mistakes That Could Destroy Your TFSA Earnings

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A Tax Free Savings Account (TFSA) can be a great way to grow your savings over the long term. But investors should be careful about using it, because if you don’t follow the rules, you could end up with fees and penalties that can wipe out a large chunk of your savings. Here are three things do not to do with your TFSA:

Buy stocks that are not listed on eligible stock exchanges

If you buy and sell stocks on large exchanges such as NASDAQ, NYSE et TSX, then it’s not something you will have to worry about. There are dozens of exchanges that the Canadian government considers “designated exchanges,” including the TSX Venture Exchange.

And if a stock does not trade on any designated stock exchange, it is not a qualified investment and therefore cannot be placed in a TFSA. This could result in penalties from the Canada Revenue Agency (CRA).

Trading too often

A TFSA is for investing, not for trading. The danger here is that if you are doing day trading stocks, the CRA might consider the income you earn in a TFSA as business income because it could argue that you are running a business rather than investing, which usually implies -term holds.

But the problem goes beyond simple day trading, as there is no hard and fast rule as to how long you should hold an investment to avoid running into trouble with the CRA.

As a rule of thumb, this probably won’t become a big deal for you unless you have a TFSA that has grown significantly (e.g., Hundreds of thousands of dollars or more) to the point that it attracts the attention of the CRA and that the agency wants to ensure there is no shortage of possible tax revenues.

Over-contribution

This is another easy mistake to make, but it is much clearer.

The risk of overcontributing is not normally that you invest $ 100,000 in your TFSA where your lifetime limit is only $ 69,500. Rather, the most likely mistake is to withdraw from your TFSA and re-contribute before the contribution room is replenished.

Suppose your TFSA limit is $ 69,500 and you contributed the full $ 69,500 on January 1. Even if you withdraw this amount on January 2, you will not be able to contribute back to your TFSA until the following year.

The reason is that the funds you withdraw on January 2 will not replenish your TFSA contribution room until the following calendar year. And so, even if you contributed $ 1 more to your TFSA before the end of the year, you will have over-contributed to your TFSA. The greater the amount of the excess contribution, the greater the penalty.

Here’s what you should do with your TFSA

If you don’t know what to put in your TFSA, a good option is an exchange-traded fund like the BMO Canadian Dividend ETF (TSX: ZDV). With the ETF, you will effectively hold a basket of stocks in your TFSA with just one investment, so you can minimize the temptation to trade too much, as it will already contain several. TSX stocks in there.

And since the ETF trades on the TSX, it’s an investment that can be placed in your TFSA. It’s also a good investment if you’re looking to make a big purchase. For example, an investment of $ 69,500 in the ETF could earn you over $ 3,800 in dividends each year at its current yield of around 5.5%.

With the best stocks like Bank of Nova Scotia, ECB, Telus, and many other large Canadian companies within the ETF, you would get a balanced investment with just one purchase.

Investing in a high-end ETF can be an easy way to grow your TFSA without worrying about having to actively manage it.

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Silly contributor David Jagielski doesn’t have a position in any of the stocks mentioned.

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