Tax-Free Savings Accounts took the Canadian personal finance world by storm when they were first introduced in 2009.
Money invested in the account is allowed to grow tax free, making it a popular choice for many Canadians.
The latest data available from Statistics Canada showed more than 15.3 million Canadians had a TFSA as of the 2019 tax year.
However, this tax-sheltered account is only as useful as one makes it to be. Yahoo Finance Canada asked three financial experts across the country about the biggest mistakes Canadians are making with their TFSA.
Not investing money in the account
The word 'savings' in the account name might skew some individuals' perception about what the account should be used for, says Mia Karmelic, an executive financial consultant at IG Wealth Management in Toronto.
"The TFSA account has been, at times, advertised as a savings account which in turn led many individuals to use it as an actual bank savings account, keeping cash and GICs within it rather than investing it in the markets," she said.
TFSAs can hold a variety of investments such as stocks, bonds, mutual funds and exchange-traded funds that can generate much greater tax savings than holding cold hard cash in the account, she adds.
"I would suggest that the funds within the TFSA be invested in a diversified portfolio according to an individual's risk tolerance, while keeping a long-term investment horizon in mind," Karmelic said.
Saving for short-term goals
Opportunity cost, or the risk of losing out on potential gains when choosing one investment over another, is a big issue for Canadians that treat their TFSA as a short-term savings account, says Alim Dhanji, a senior financial planner at Assante Financial Management in Vancouver.
"To take full advantage of a TFSA, I'd recommend maximizing your contributions each year and investing for the long term, he said.
"If you use your TFSA like a regular savings account and hold only cash or cash equivalents, you may miss out on long-term investment opportunities."
High Interest Savings Accounts, which offer a higher interest rate than typical savings accounts, or GICs, that offer a return on cash with very low risk, are much better alternatives for short-term savings goals, Dhanji says, depending on the individual's unique financial situation.
Losing track of contribution room
The 2023 contribution limit increased by $6,500, bringing the total contribution limit to $88,000 (if you've never contributed to a TFSA before).
The good news is contribution room accumulates each year, but investors need to be extra careful about their contribution limits, especially if they've withdrawn money in the current year or have multiple TFSAs.
"The reality is that many people have added money, taken it out, and opened accounts at different institutions over the years – so calculating your TFSA room now becomes akin to solving a quadratic equation," Kalee Boisvert, a Calgary-based financial advisor at Raymond James, said.
She reminds investors who max out their contributions in a given year and then withdraw money will have to wait until the next year to have that contribution room added back.
"Let's say you withdrew $8,000 last year. When January 2023 comes around, you not only have the additional annual room of $6,500 that all Canadian residents 18 and older receive, but you also get the $8,000 contribution room added to your total room (from the withdrawal) as well," she said.
Exceeding your available contribution limit in a given year could result in a one per cent penalty per month on the excessive amount until it's withdrawn. In some cases, the Canada Revenue Agency can forgive the penalty if the excess contribution is withdrawn quickly.
"If you've been keeping an up-to-date spreadsheet of each deposit and withdrawal from your TFSA(s) over the years, then kudos to you! But for the majority of people who didn't realize it could get this complicated, don't worry, all hope is not lost," Boisvert said.
The best place to confirm contribution room is MyAccount on the CRA website, but she cautions money flows in and out of the account in the previous year might not be reflected until the end of February.
"To feel confident about managing your TFSA room, I suggest using a combination of tracking your deposits and withdrawals and confirming with the number reported by the CRA. To keep it simple, consider sticking to having just one TFSA account rather than multiple accounts across different firms," she said.
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.