© Reuters. A TFSA asset allocation error with a return of $0
The Tax-Free Savings Account (TFSA) is the best investment vehicle for Canadians to achieve their short-term, long-term and retirement financial goals. Unlike the Registered Retirement Savings Plan (RRSP), you can keep your TFSA beyond age 71.
The government wants users to benefit from the tax-free money growth of TFSAs for life. Eligible investments include bonds, mutual funds, GICs, ETFs, stocks and cash. All interest, gains or capital gains inside the account are exempt from tax. As a result, the TFSA balance grows faster. Withdrawals are also tax-free, so there are no penalties.
Asset Allocation TFSA users should also consider asset allocation as important as tax exemptions. The TFSA is not an ordinary savings account, as its name suggests. Many users underutilize their accounts or miss out on huge tax savings because they hold more cash than income-generating assets.
It’s true that cash is king, but the TFSA is not a deposit of idle money. Although cash is instant liquidity, the return from a TFSA is negligible, if any. The financial instruments mentioned above will yield much more than money.
Many TFSA account holders prefer dividend-paying stocks, due to higher yields and recurring income streams, usually quarterly. Your balance should accumulate faster if you continue to reinvest dividends. As long as you don’t overcontribute or run a business by buying and selling stocks, the Canada Revenue Agency (CRA) won’t step in and impose taxes.
Cheap Cash Cow If you’re concerned about budget or don’t have enough to max out the 2022 annual limit, cheap dividend stocks are available. Diversified Royalty (:DIV) trades at just $3.28 per share but pays a generous 6.71%. Instead of spending $1,000 on useless stuff, invest the money in this royalty stock to generate $67.10 of tax-free passive income.
The $395.86 million multi-royalty company owns the trademarks of six ongoing commercial ventures. It receives revenue or royalties from Mr. Lube, AIR MILES, Sutton, Mr. Mikes, Nurse Next Door and Oxford Learning Centre. Under pre-pandemic or normal conditions, royalty streams are predictable and growing.
The good news for investors is that the company returned to profitability last year. For the year ended December 31, 2021, net income reached $23.5 million, compared to a net loss of $8.9 million in 2020. Its President and CEO, Sean Morrison, said: “DIV is well positioned for a strong 2022 with continued improvement from our royalty partners. and increased royalty earning opportunities.
Long-term holding Canada’s sixth largest bank is an ideal holding for TFSA investors building retirement wealth. National bank of Canada (TSX:TSX:) continues to impress investors. In the first quarter of Fiscal 2022 (quarter ended January 31, 2021), net income increased 22% to $932 million compared to the first quarter of Fiscal 2021.
Laurent Ferreira, President and CEO of NA, said, “Strong revenue growth enabled the bank to achieve a strong return on equity in the first quarter. At $93.58 per share, potential TFSA investors can participate in the 3.72% yield. Payment is expected to be secure, recurring and sustainable, given the low payout ratio of 31.71%.
Hold less cash Cash is acceptable in a TFSA, but users should allocate less in the account. More emphasis should be placed on the growth of tax-free money and the tax-saving features of the unique investment vehicle.
Dumb Contributor Christopher Liew has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned.