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This Is the Number 1 TFSA Mistake You Must Avoid

Adam Othman
Chalk outline of two arrows pointing in opposite directions
Chalk outline of two arrows pointing in opposite directions

Investors looking to ensure a financially secure retirement for themselves, or meet any other savings goal, have many opportunities to consider. Typically, people invest in bonds, property, or even gold to ensure a high-quality lifestyle later on. A lot of people saving up for retirement also invest, using a Registered Retirement Savings Plan to accumulate wealth over a long time.

I think a Tax-Free Savings Account (TFSA) serves your savings goals much better than any other prospects you can consider.

What is a TFSA?

TFSAs are perhaps the most versatile type of account created for Canadians aged 18 and above. It is an account that does not apply taxes or management charges on any contributions, dividends, capital gains, or interest earned. Even the withdrawals from TFSAs are entirely tax-free.

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The Canadian government introduced TFSAs as a way to encourage more people to save money. Any money or financial assets you store in the TFSA, you have already paid tax on. It means that you will not have to worry about paying anything on the cash accumulating in the account, and you will not have to worry about that when you take the money out.

Are you wondering what the biggest mistake Canadians make when it comes to TFSAs?

Easily avoidable mistake

The Canadian government introduced TFSAs back in 2009. The nature of the account allows you to store cash, guaranteed investment certificates, stocks, bonds and exchange-traded funds. In the 10 years that TFSAs have been around, the most significant mistake Canadians make with TFSAs is that they do not even bother opening one at all.

According to Statistics Canada, in the time TFSAs have been around, only 40% of Canadian families are taking advantage of this fantastic savings tool. Why are almost half of all Canadians not using TFSAs?

The only logic I see behind it is that people do not understand TFSAs. Banks don’t bother educating their clients much about TFSAs because it is more profitable for banks to see their clients’ money sitting in regular savings accounts.

How to make the most of your TFSA

A TFSA is a versatile storage option for different financial assets. While you might feel inclined to use your TFSA as a savings account for your cash, I think there is a much better way to use the TFSA: invest in reliable dividend-paying stocks. Since none of your contributions stored in a TFSA are taxed, any gains on your stocks and dividend payouts added to your account will also be safe from taxes.

To this end, a stock like Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) presents an excellent option to consider. Canada’s banking sector is one of the most reliable performers in the world. BNS has the most influential international presence among the Big Five Canadian banks. The bank has a lot going its way.

Trading at 1.54 times past earnings, the stock’s $75.55 price at the time of writing is a bargain. Additionally, BNS has a juicy dividend yield of 4.77%. The bank sold a lot of its assets in smaller Latin countries to invest in more profitable markets in the region. With plenty of room to grow, BNS is likely to bet bigger on this market segment compared to its counterparts.

Foolish takeaway

To avoid making the TFSA mistake of not even opening one, the first thing you need to do is open a TFSA in the first place. Once you open an account, you should invest in stocks like Bank of Nova Scotia so that you can make the most of it.

More reading

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends BANK OF NOVA SCOTIA.

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