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Why It Makes Sense to Hold Equities In Your Tax-Free Savings Account?

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As an investor, you can invest in different investment options. And Tax-Free Savings Account (TFSA) is one such popular investment option among Canadians.  

What is Tax-Free Savings Account?

TFSA is a registered account where you can make investments in various options such as stocks, bonds, mutual funds up to a certain limit. The best part of this account is that the Canada Revenue Agency (CRA) doesn’t tax the dividends, interest income and capital gains from this account.

Although you can invest in different types of investment options, it makes a lot of sense to invest in equities through your Tax-Free Savings Account. Equity investments in TFSA can constitute stocks, equity index funds, equity ETFs and equity mutual funds.

Equity investments have the potential to deliver higher returns than the other asset classes in the long term and create wealth for investors. And investing in equities with no tax liability can help to supercharge your equity portfolio.

Why should you hold equities in your Tax-Free Savings Account?

Earn tax-free dividends and capital gains

Dividends or capital gains from equity investments are tax free i.e., you don’t need to pay any taxes on profits or dividends to the Canada Revenue Agency as the amount that you contribute to TFSA is your post-tax contribution.  

Avail the benefits of compounding

Compounding is the phenomenon where you get returns on the returns earned by your investment. The longer you stay invested, the powerful is the impact of compounding. However, you may need to withdraw from your account under certain circumstances. At the same time, your remaining contribution will continue to generate returns.   

Sizeable contribution limit  

The government announces the contribution limit to TFSA every year. The current contribution limit is $6000. However, that’s not all. Since TFSA was introduced in 2009, you can make use of the unused contribution room. However, please keep in mind that you need to be above 18 years to hold investments in this account. So, if you were eligible to invest in TFSA in 2009, your total contribution room is $75,500.

You can invest a portion of this contribution limit in equities and earn tax-free dividends and capital gains.

Making equity investments through Tax-Free Savings Account can help you derive the maximum benefits from equity investments. If you are young and want to invest in a tax-efficient option that can help you generate high returns, you can invest in equity investments through your Tax-Free Savings Account.      

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