Take advantage of tax-free growth in your TFSA

A couple reviewing the range of investments in their portfolio.

There are a range of investments that can be held in a TFSA.

Since the introduction of the Tax-Free Savings Account (TFSA) in 2009, many Canadians have used it to boost savings or as an emergency fund. However, the tax advantages of the TFSA also make it ideal for long-term investment growth. That's because all investment earnings in a TFSA — including interest income, dividends and capital gains — grow free of tax.

This tax-free compounding can result in greater wealth accumulation over time and may help you meet your long-term financial goals. Here are some ways to benefit from a growth-oriented TFSA strategy.

Seize market opportunities. The range of investments that can be held in a TFSA includes equities, bonds, real estate investment trusts (REITs), currencies and mutual funds, among others.

If your research has uncovered an investment opportunity, you might use the funds in your TFSA to purchase your investment. Any capital gains you earn are tax-free and you'll pay no income tax on withdrawals. However, keep in mind that you are not entitled to claim capital losses in your TFSA.

Reduce taxes on foreign dividends. A TFSA can be advantageous for those who invest in foreign dividend-paying stocks. Foreign dividends are not eligible for the dividend income tax credit, which is designed to provide a tax break for Canadian-sourced income. By holding foreign dividend stocks in a TFSA, you can minimize taxes on dividends and generate tax-free capital gains.

Build a long-term growth portfolio. By taking advantage of growth-oriented investments in your TFSA to enhance returns, you may have greater potential for supplementing your retirement savings above and beyond your registered Retirement Savings Plan (RSP).

One significant advantage of the TFSA is that withdrawals are not considered "income" for tax purposes — so withdrawals will not affect your eligibility for income-tested government benefits, such as Old Age Security. Since there is no requirement to close your TFSA account at a certain age, you can use your TFSA as a tax-free savings vehicle to meet ongoing needs in retirement.

The Markets & Research section in WebBroker can help you identify investment opportunities for your TFSA. If you don't already have a TFSA, you can apply online.

The information contained herein is current as of November 18, 2011.

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