TFSA Money – How to Grow Your Wealth with Tax Free Stocks

The Tax-Free Savings Account (TFSA) is one of the best investment vehicles available to Canadians. Being able to keep stocks and bonds tax-free can save you a lot of money. To put it in perspective, your total return on an investment is post-tax. If you pay 30% tax on a 100% return, you only get a 70% return. However, if you post a 100% return to a tax-free account, you collect the full 100%. Let’s examine how you can grow your wealth with tax-free TFSA shares.

Step 1 – Open a TFSA

The first step to investing in a TFSA is to open an account. To do this, go to your bank and ask for an appointment with a financial advisor. You then have a meeting with your advisor who puts you in touch with a TFSA. If you plan to manage your own investments, consider applying for a self-directed TFSA. Bank advisors have an incentive to sell the bank’s own funds and thus tend to push you into pre-invested TFSAs by default.

Step 2 – Find out what types of investments are best suited for a TFSA

Once you open your TFSA, you need to decide what to keep in it. In general, TFSAs are best suited for investments that will become taxable in the near future. This includes:

1. Bind
2. Dividend paying stocks
3. Stocks that you only want to hold for a short time

Bonds and dividend stocks both produce regular cash flows that become taxable once they’re paid. Even if you automatically reinvest your dividends, you still have to pay tax on them. Therefore, income-generating investments tend to be good candidates for TFSAs. If you own both bonds and dividend stocks, bonds take precedence because they’re taxed more heavily than dividend stocks.

It’s a similar concept with stocks that you want to hold for a short period of time. If you like stocks Shopify Inc. (TSX:SHOP)(NYSE:SHOP) you may have a relatively short holding period in mind. Shopify stock is up many thousands of percentage points at times. When you hit a win like this, you might want to cash it out and treat yourself to some luxury. If you buy SHOP or any other growth stock and plan to sell within the next year or two, you might want to hold it in a TFSA. Similar to a dividend stock or bond, the return on a very short-term trade is taxable.

Barring a short-term scenario, technology stocks like Shopify aren’t typically ideal for TFSAs. If you plan to buy Shopify and keep it forever, you might never pay taxes on it. You pay no tax on capital gains until you sell. So holding a stock like SHOP in a taxable account forever leaves more room in your TFSA for dividends and interest.

Step 3 – Contribute consistently over time

The third and final step in earning tax-free wealth in your TFSA is to make a consistent contribution over time. TFSAs gain a little space each year, so you can always contribute a little more at the start of each new year. The more you invest, the greater your overall return, so make sure you contribute to your TFSA on a regular basis.