Friday, May 21, 2010

TFSA Investment Strategy: Capital Gains Permanently Increase the Contribution Room

Currently you can only contribute $5000 a year to a Tax Free Savings Account (TFSA).  However, any capital gains to investments in a TFSA permanently increase the contribution room.  

So let's say one year you put $5000 in a TFSA, and it doubles to $10000 because of some clever investment picks. That $10000 is now your investment limit for the year.  The money can be completely withdrawn (without tax), and the full $10000 recontribute in the same year, or any year after.  

However, if your $5000 TFSA investment dwindles to nothing, then the contribution room is permanently lost.  

In conclusion, if $5000 doesn't mean much to you, then go for broke and invest in high-risk but high-gain equities for your TFSA - if you're lucky you might hit it big.  If the $5000 is a significant sum of money for you, then you might want to take it easier and invest in something that's lower risk (but still gives a reasonable return).

ING Direct Canada have three mutual funds you can invest in, all eligible for TFSA status.  They are (in order of increasing risk)
  • Streetwise Balanced Income
  • Streetwise Balanced
  • Streetwise Balanced Growth
Increasing risk reduces the fraction of bonds, and increase the fraction of equities in the fund.  Read the fund prospectuses at before you make any investment decisions.

If you're new to ING Direct Canada, then use Orange Key Code 34431191S1 when you open your account at  This will give you a free $25 bonus when you make an initial deposit by cheque of $100.

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