In this video, we go over the Tax Free Savings Account (TFSA), and discuss how you should be investing with your TFSA in order to achieve the maximum amount of growth in the shortest possible period of time...
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Whenever you open an investment account with a broker, you will can open either a normal investment account, or a registered investment account. Registered accounts are tax sheltered accounts monitored by the government that enable you to grow your investment free of taxes, meaning that you won't have to pay taxes on any profits you receive on your investments in these accounts. The most notable tax sheltered accounts in Canada are the TFSA and the RRSP, and in this video we focus on the benefits of the TFSA account and how you should be investing in your TFSA.
We first start by discussing stocks, and the fact that generally speaking there are two types of stocks... growth stocks, and dividend stocks.
Growth stocks are stock that grow in value at a high rate over time, for example the likes of Google, Facebook, Apple, Disney, etc. These stocks are attractive investments due to their high potential in gaining substantial value over time.
Dividend stocks on the other hand, are stocks that lack the incredible gain in value that growth stocks exhibit, which means that they have to attract investors in a different way. As a result, these stocks payout a portion of the company's profits (referred to as dividends) to the investors in order to entice them to invest and hold their shares.
When it comes to investing in a TFSA, dividend stocks are the way to go, primarily due to the tax implications from these stocks. With a growth stock investment, you will only pay taxes on your profits if/when you sell your holdings, whereas with a dividend stock, you will have to pay taxes every single quarter as you receive your dividend payments. This in turn means that it is much more to your benefit to keep your dividend stocks in a tax sheltered account, as this will protect you from capital gains taxes on your dividends, and by holding onto your growth stocks in a non-registered investment account, you will not be required to pay any taxes there either.
Another key factor to pay attention to is that you should be investing into Canadian Dividend Stocks in your TFSA, and not US Dividend Stocks. The reason for this is that with US Dividend Stocks, you are still obligated to pay a US Withholding Tax on your dividends, whereas you wouldn't have to pay such a tax with Canadian Dividend Stocks. In fact, the only account where you can avoid the US withholding tax is the RRSP. Therefore, the best solution is to buy & hold your Canadian Dividend Stocks in your TFSA, buy & hold your US Dividend Stocks in your RRSP, and keep your growth stocks in a non-registered account.
If you are looking for examples of good Canadian dividend stocks that provide offer competitive dividend payments, as well as being stable and reliable stocks for long term investments, my favourites are Canadian Utilities (CU.To), BMO, TD, and Enbridge (ENB.To). If you are looking for index funds/ETFs that contain a large pool of Canadian dividend stocks, my favourites are VDY (Vanguard FTSE Canadian High Dividend Yield Idx) and XEI (iShares S&P TSX Composite High Dividend Index).
When investing, always make sure to diversify your portfolio, and essentially avoid putting all your eggs in one basket. This way, if one of your investments end up underperforming for whatever reason, your other investments will be able to steady the ship and keep your capital growing regardless.
Keep in mind that your TFSA account has a limited contribution room and you should never contribute more than this amount to your account, otherwise you will be fined by the government. Your allowed contribution room depends on your year of birth and how long you have lived in Canada, and you can see your available contribution limit by logging into your CRA account.
I will cover the TFSA contribution room, as well as deposits and withdrawals in a separate video in full detail
