“My question is related to the TFSA. I am currently debating whether or not I should trade stocks within a TFSA or an un-registered account. I understand the benefits of having your ROE grow tax-free which is great. However, if I’m not mistaken, the TFSA doesn’t allow you to claim your losses against your growth. Of course, I wish every trade was a winning one then the answer would be easy but that’s not the case. I consider myself a swing trader so I do not normally hold long position except for a few ETFs. So the question is, is it worth it to trade within a TFSA?”
A TFSA (tax free savings account) is a relatively new savings option for Canadians and many investors are asking themselves this very question when trying to plan how to utilize various investment accounts such as registered savings plans (RSP’s), non-registered investments and a TFSA.
Capital gains are not taxed within the account, but on the other hand an investor is not able to capture capital losses like they are in a non-registered account. For a non-registered portfolio you can match a capital loss against a capital gain to cancel out any taxes paid on gains from a trade or investment. In a TFSA that privilege doesn’t apply so the question you really need to answer for yourself concerns risk.
Capital losses, when investing, are inevitable and every investor should realize this. Whether you lose money due to inflation, a decreasing price of an investment or fees there will always be many opportunities for you to lose a portion of your investment. What a conservative investor wants to do is minimize risk and exposure to losses within a TFSA and maximize the benefits that the TFSA offers.
My initial thoughts are that an investor wants to keep only conservative investments within the TFSA to avoid, as best as they can, any capital losses against that stock, bond, ETF or mutual fund since there’s no downside tax advantage for aggressive trading. This is where an indexed strategy (the couch potato) would perform very well. By investing in index ETF’s and mutual funds and rebalancing each year an investor is not concerning themselves with capital gains or losses but methodically applying a conservative strategy that moves gains from some funds to losses of another. Over time the portfolio grows tax free and your losses are kept to a minimum because you’re simply investing with the market.
If you do choose to invest in individual stocks within the TFSA I would encourage you to choose very conservative stocks that over the long-term have great investment prospects. Large cap companies in the insurance, telecom, utilities and energy industry might be good choices if you have the room in a few years to diversify your portfolio into 10-12 stocks. Until then I would advocate, as I have already, that a TFSA be used as a savings vehicle or for an indexed investment strategy.