This is the time of year that everyone should be planning on making their Tax-Free Savings Account contributions. For 2024, the limit has been increased from $6,500 to $7,000.
I suggest that you contribute as early in the year as you can to gain more tax sheltered protection for any income or growth your investment may have.
The name of this tax sheltered account is a bit misleading to some. Many people think that they put money into it and just think of it as a savings account like your bank account. This is not true. Any investments, like for your Registered Retirement Savings Plan (RRSP), can be bought or transferred from your non-registered investment account into your TFSA. Funds inside a TFSA can be used to invest in stocks, bonds, mutual funds, GICs, etc.
The decision on what to invest in requires more thought than what most people think.
Do I keep it “safe” and buy a GIC? Do I shelter the dividend yield that I get from a stock? Do I buy a mutual fund and reinvest the income and let it sit for the long term?
These are some of the questions you should ask yourself.
Initially we think, “I should protect the income from an investment inside the tax shelter.” Then, we often buy or transfer in a higher paying stock such as a bank, utility or telecom company. What may not come across our radar of choices is investing in solid U.S. companies. Any dividends that are paid from a U.S. company into an account other than one deemed for retirement purposes is subject to a non-resident withholding tax. We hear the word “tax” and that may be the deterrent from buying in our TFSA. When you take a more in depth and closer look, the dividend yield on US stocks is comparatively low versus Canadian stocks.
To clarify, if you have on file with your TFSA provider a W8-BEN showing you are a resident of Canada the non-residency withholding tax is reduced from 25% to 15%.
It sounds like a lot, but if the dividend amount is US$1.84 as it is presently for Coca-Cola Company, the amount of tax deducted is $0.276. In the grand scheme of things, it is not that much. Often U.S. stocks are more appealing for their price appreciation than for their yield.
I have clients who have contributed the lifetime maximum of $95,000 to their TFSAs, and their accounts are now worth a couple of hundred thousand dollars. It hasn’t mattered that it has come from price growth rather than dividend income. Bottom line for this account is the overall value.
For this year’s TFSA contribution, consider investing in a good name brand blue chip U.S.-listed company. Over the long term, you may experience significant growth that is tax sheltered. When you take those juicy capital gains out eventually, they are not taxed like they are if they are held in your RSP.
Just a thought. Feel free to leave a comment on this article on how you’ve been investing the funds within your TFSA.
Nancy Woods is Portfolio Manager and Senior Investment Adviser with RBC Dominion Securities Inc. Visit her blog, “Nancy’s Notes,” at nancywoods.com or send her your question to [email protected]
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