Since its inception in 2009, the TFSA has increasingly grown in popularity as more and more Canadians embrace it – over 40% of Canadian households contributed to the TFSA during the 2015 tax year.

A TFSA (Tax-Free Savings Account) 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 ($5,500 for 2018), 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 now $57,500.

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.

Five Options for Investing Your TFSA

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. Read my full disclosure here.

1. Cash

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 TFSA’s, such as:

  • Tangerine TFSA: 2.75% promotional savings interest rate. Use my Orange key code (43979980S1) on sign-up to get an additional $50 cash bonus deposited in your savings account after you fund it with at least $100.
  • EQ Bank2.30% non-promotional interest rate.
  • Implicitly Financial TFSA – 2%
  • Simplii Financial TFSA – 1.10%
  • CIBC Tax Advantage Savings Account – 0.7% (promotional bonus interest of 1.60%)
  • TD High Interest TFSA – 0.85%

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: Complete List of High-Interest Savings Accounts in Canada

2. GICs

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.

For example, the Tangerine Tax-Free Guaranteed Investment has the following for interest rates:

  • 180 days: 0.50%
  • 1 year: 2.00%
  • 3 years: 2.30%
  • 5 years: 2.60%

You can purchase GICs though your bank, credit union, and other financial institutions.

Related: The Top GIC Rates in Canada

3. 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.

4. 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.

5. Index Funds and ETFs

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.

There are many options for investing in a TFSA using index funds, including one-fund solutions, individual index funds, and ETF’s.

Exchange Traded Funds (ETFs) are unlike traditional mutual/index funds in that they are traded like stock on an Exchange and their prices change throughout the day. Fees are also generally lower than for index/mutual funds. However, you may incur fees/commissions when buying or selling ETFs through your brokerage.

ETF’s share of the market keeps growing in Canada, and assets under management are expected to reach $400 billion by 2023, following recording inflows of over $26 billion in 2017.

A sample model TFSA portfolio (assertive) using ETFs and the Canadian Couch Potato strategy is:

  • BMO Aggregate Bond Index ETF (ZAG) – 25%
  • Vanguard FTSE Canada All Cap Index ETF (VCN) – 25%
  • iShares Core MSCI All Country World ex Canada Index ETF (XAW) – 50%

One downside to using some ETFs/index funds is that you may need to rebalance your portfolio at least once a year – some may find this cumbersome.

I currently utilize about half of my annual TFSA contribution limits as we are working on paying-off all non-mortgage debt first. Given that my portfolio size is small (~$10,000), I use TD e-Series Funds with a target allocation of 80% equities and 20% bonds. My asset allocation looks like this as of today:

  • TD Cdn Index-e: 26%
  • TD U.S. Index-e: 28%
  • TD Cdn Bond Index-e: 20%
  • TD Int’l Index-e: 26%

When the account grows larger, I plan to transition to an all-ETF portfolio, with asset allocation similar to the model portfolio I showed earlier.

Conclusion

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 investing 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.

5 Ways To Invest in Your TFSA #1