If you’re one of the millions of tax-free savings account (TFSA) holders who have managed to squirrel away some 2020 contribution cash over the holidays, congratulations.
With an additional $6,000 in contribution space as of Jan. 1, you can avoid paying tax on any investment gains. The only question is: what should you invest in to generate those gains? Here are six questions to ask yourself before hitting the buy button.
1. When will I need it? Choosing how to invest your TFSA contribution greatly depends on when you will need the cash. This is known as your time horizon. Another great thing about a TFSA (aside from its tax-free status) is cash can be withdrawn at any time. It’s just important to keep in mind that if you max out your 2020 contribution space, you need to wait until 2021 to redeem it.
TFSAs can be used for long-term retirement goals or short-term savings goals, and that makes them ideal for long-term conservative investments or short-term risky investments. If you choose the latter, be sure to also ask yourself if you can deal with a short-term loss.
2. How does it fit into my portfolio? Review the holdings already in your TFSA, registered retirement savings plan (RRSP), defined contribution pension, or any other investment account. Lean toward sectors, geographic regions or risk levels that are under-represented. If your combined portfolio is already diversified, consider topping up investments you like – especially if they are down.
3. What do I invest in? Like an RRSP, tax-free savings accounts allow you to invest in just about anything including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and options. You can even trade in U.S. dollars if you want a truly international component. If your TFSA is maxed out, consider leaning toward bonds or other fixed-income products. The income they generate would be fully taxed outside a TFSA, compared with stocks, where you only have to pay tax on half of the gains made outside of a registered account.
4. How much should I spend on a single investment? It depends on the investment. Experts recommend keeping stock purchases below 10 per cent of the overall portfolio so a loss will have a limited impact and a gain will help lift it. You can take a bigger proportional position in mutual funds or ETFs since they have several holdings. Speaking with a qualified investment advisor might help you decide.
5. What about fees? Fees are always important because whatever you pay is that much less than what can be invested and compounded over time. As a general rule, stock purchases generate a one-time fee, and ETFs charge an additional annual fee based on the percentage of the amount invested. Mutual funds impose annual fees as high as four per cent, which can really eat into your returns. The investment industry is always coming up with new ways to sneak fees by investors, so it’s a good idea to contact the institution you deal with for a clear explanation.
6. Can I keep it in cash? Yes, you can, but that’s where the name of the TFSA can be deceiving. If you save but don’t invest your money in a TFSA, its tax-free status is lost because it only applies to investment gains. The financial institution you deal with will pay a token amount of interest on cash balances, or you can make a pittance in a money market fund, but the tax savings are so small that your money will only be taking up potentially useful space in your TFSA.
Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email dalejackson.paybacktime@gmail.com.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
