I’ll be the first to admit that when I first opened a Tax-Free Savings Account (TFSA), it was all pretty overwhelming. I opened the account during one of the first few years, with contribution room far lower than the $63,500 that it has reached today. Back then, I was mainly worried about over-contributing, which could result in taxes from the government.
Now that the contribution room is much higher, however, I don’t worry so much about over-contributing. Not as a millennial. While I do have some savings, I don’t feel I’ll reach that level of contribution for a few years. With a toddler, a baby on the way, and a mortgage to pay for, I can’t have cash just sitting around. Even if that cash is making me money. And, frankly, I’m one of the lucky ones.
Yet there are plenty of other errors millennials could be making, and some are all too common. But the biggest problem besides over contributing can still cost you some serious cash.
That problem: foreign investments.
I made this mistake early on, as it isn’t a common concern that comes up with your banker when you open a TFSA. This can be seriously harmful, as some of the more popular stocks out there are usually what new investors will seek out first, and those stocks a lot of the time are from the United States.
Take me for an example. I decided to buy a few Tesla stocks and Nvidia when I opened my TFSA, and within a year I found myself regretting it. While the stocks themselves did alright at the time, I discovered that U.S. stocks are subject to a withholding tax when put in a TFSA. The Internal Revenue Service (IRS) levies a 15% withholding tax on any dividends that come from these foreign investments.
That doesn’t just mean individual stocks either. This can come from mutual or exchange-traded funds (ETFs) that own U.S. stocks as well. So, if you’re looking to buy up a fund with some U.S. diversification, be very careful. But there are ways to get some foreign diversification and stay away from the tax man.
Consider banking stocks. Canadian banking stocks are a great way to see conservative growth, while also bringing in some diversification to your portfolio. The stocks themselves don’t actually invest in U.S. funds, but many do operate in the United States.
Take Toronto-Dominion Bank (TSX:TD)(NYSE:TD) for example. This bank has become Canada’s most American bank and is now one of the top 10 banks in the country. Its expansion has been highly lucrative, and it’s only the beginning of this growth path. Investing in a stock like TD Bank (which is undervalued at the moment) is a great way to bring in steady growth to your TFSA, while still getting some foreign help.
Another way to diversify and also keep it a bit exciting is investing in tech stocks, hence why I chose something like Nvidia. However, rather than invest in an American stock, consider a Canadian company that has already grown globally and has the chance to expand even further.
In this case, I would choose Lightspeed POS (TSX:LSPD). This company holds the title of biggest initial public offering (IPO) of the year in Canada at $240 million and the biggest in the tech sector in the last nine years.
Revenue has been expanding at a rapid rate, and the company is seeing sales in 100 different countries as of writing. But right now, Lightspeed is only focused on small- and medium-sized businesses. That means there is plenty of room for growth moving forward.
So, don’t make the mistake I did as a new investor. It might seem like a no brainer to invest in U.S. stocks when you start out, but it can lead to a 15% haircut on anything you make thanks to the IRS. Instead, stick to Canadian companies that still diversify your portfolio. That way, you get the best of everything and the biggest bottom line.
Fool contributor Amy Legate-Wolfe owns shares of Lightspeed POS Inc and TORONTO-DOMINION BANK. David Gardner owns shares of Tesla. Tom Gardner owns shares of Tesla. The Motley Fool owns shares of Lightspeed POS Inc, NVIDIA (NASDAQ:NVDA), and Tesla. Nvidia and Tesla are recommendations of Stock Advisor Canada.
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