Since its inception in 2009, the Tax-Free Savings Account (TFSA) has increasingly grown in popularity as more and more Canadians embrace it – over 69% of Canadian households contributed to the TFSA during the 2018 tax year.
A TFSA is a registered account you can use to save/invest funds while shielding your investment returns (dividends, interest, and capital gains) from taxes for life.
Every year, the government announces the contribution limit ($6,000 for 2021), and unused contribution room can be carried forward indefinitely. If you have been eligible to contribute to a TFSA since 2009, your accumulated contribution room is $75,500 in 2021.
The TFSA is versatile and can be designed to meet various specific goals, including retirement savings, down payment for a house, debt repayment, emergency fund, etc.
So what are some of the investment assets you can put in your TFSA?
Best TFSA Investment Options Canada
There are several options when it comes to investing or saving within your TFSA account. Please note that the 5 options below are examples only and do not represent financial advice or a call to specifically use any of these options for your TFSA.
This is as simple and as conservative as you can get – apart from keeping money under your couch. 😉
You can keep your cash in a savings account and earn interest on it like you would for any other savings account. There are “high-interest” savings accounts specifically designed for TFSAs, such as:
- EQ Bank TFSA: Earn a standard 2.30%* rate on your Tax-Free Savings Account. It also offers TFSA GICs – learn more in this review.
- Tangerine Bank TFSA – 0.10%
- Simplii Financial TFSA – 0.10%
- CIBC TFSA Tax Advantage Savings Account – 0.05%
- TD High-Interest TFSA – 0.05%
The decision to put TFSA funds in a high-interest account may be due to a short investment horizon, low-risk tolerance, etc. If you want to be able to access your funds at short notice or for unexpected expenses (i.e. emergency fund), cash in a savings account is one option for you – another is the use of GICs.
Related: Best TFSA Savings Accounts in Canada
2. Guaranteed Income Certificates (GIC)
Also referred to as Term Deposits, Guaranteed Investment Certificates (GICs) are another option for those who want their TFSA investment in low-risk to risk-free investments.
A GIC will pay you a fixed interest rate on principal invested and your principal investment is 100% protected. There are so many types of GIC’s – in general, GICs of varying terms will attract different interest rates.
Term lengths can be anywhere from a few months to several years and your funds are locked-in for that length of time.
For example, EQ Bank’s Tax-Free Guaranteed Investment Certificates have the following for interest rates:
- 3 month GIC: 2.30%
- 6 month GIC: 1.80%
- 9 month GIC: 1.65%
- 1-year GIC: 1.50%
- 2-year GIC: 1.30%
- 3-year GIC: 1.60%
- 4-year GIC: 1.85%
- 5-year GIC: 2.10%
You can purchase GICs through your bank, credit union, and other financial institutions.
Related: The Top GIC Rates in Canada
3. ETFs and Index Funds
Exchange-Traded Funds (ETFs) are unlike traditional mutual/index funds in that they are traded like a stock on an Exchange and their prices change throughout the day. Their fees are also generally lower than for index/mutual funds.
ETFs are a great investment option for a self-directed TFSA account. Watch out for the fees/commissions you may incur when buying or selling ETFs through your brokerage account.
Questrade offers up to $50 in free stocks or ETF trades when you sign up. A $1,000 minimum balance is required to trade using Questrade.
ETF’s share of the market keeps growing in Canada, and assets under management are expected to reach $400 billion by 2023.
One downside to using ETFs/index funds is that you may need to rebalance your portfolio at least once a year – some investors may find this cumbersome. That said, you could also buy all-in-one ETFs that take care of this automatically.
An alternative to investing in ETFs using a self-directed brokerage account is to use the services of a robo-advisor. Robo-advisors allow you to invest in low-cost ETFs without having to worry about re-balancing your portf0lio or anything at all, and they charge a much lower fee than your mutual fund manager.
Index funds are similar to mutual funds in that they are a basket of stocks, bonds, commodities, etc. However, unlike mutual funds, index funds are designed to represent an index or a broad section of the “market”, with the hope of generating the returns experienced in that “section” of the market.
For example, an index fund that tracks the S&P 500 will hold stocks that represent the composition of the S&P 500, and investors who hold that index fund are theoretically hoping to replicate the S&P’s annual return (i.e. market return).
Index funds generally have lower fees than traditional mutual funds because fund management is more passive than it is active, leading to lower operational/admin costs. A sample portfolio’s asset allocation using TD e-Series Funds could look like this:
- TD Cdn Index-e: 26%
- TD U.S. Index-e: 28%
- TD Cdn Bond Index-e: 20%
- TD Int’l Index-e: 26%
4. Individual Stocks and Bonds
You can buy and hold individual stocks and bonds (government and corporate) in your TFSA account. This approach comes with its own challenges, as you should always consider diversification with your investing strategy to lower risk.
As part of a wider portfolio asset allocation, buying individual stocks and bonds can work out great.
Note that if you buy U.S. dividend-paying stocks in your TFSA, you will be subject to a 15% withholding tax. This is however not the case with Canadian dividend stocks.
5. Mutual Funds
Mutual funds generally refer to collections of investment assets such as stocks, bonds, etc. that are actively managed by a professional manager or investment company.
Mutual funds are an easy way to build a diversified portfolio without having a great deal of investment knowledge. Mutual funds come with fees including MER and other admin fees.
Want to minimize your investment fees? Check out this article on Investment Fees in Canada.
There are literally thousands of mutual fund options out there and you can easily approach your bank to open a mutual funds TFSA account. These funds are generally structured to cater to different investing styles and risk tolerances.
TFSA’s are very flexible and this is one reason why they are very popular. You can make withdrawals from your account and are allowed to re-contribute any withdrawal amounts in the following year.
Don’t forget that there’s a blacklist of investments (non-qualified or prohibited) that you should avoid in your TFSA.
As with any other investment strategy, you should decide on how you invest your TFSA after carefully examining your financial goals, investment time horizon, risk tolerance, investment knowledge, fees, and portfolio size.