This post may contain affiliate links. Please read our disclosure for more info.

The Tax-Free Savings Account (TFSA) has been well received by Canadians going by the recent polls showing that more Canadians now have a TFSA (57%) compared to an RRSP (52%).

TFSAs are indeed versatile tools in that you can use them to save or invest for practically any purpose, and not only for retirement. You can also withdraw your money at any time.

This ease of use and withdrawal has its challenges however because the same poll showed that a big chunk of TFSA funds are being stowed away in savings accounts (42%).

Perhaps, you can blame the federal government for giving the account a name that suggests its principal purpose is to “save” money.

What investments can you hold in a TFSA account? It’s actually a lot. Basically, most investment assets that can stay in your RRSP are acceptable in a TFSA.

Read on to see some of the best TFSA investment options for your tax-free savings account.

Best TFSA Investment Accounts

To start, let us clarify what the government permits you to invest in using your TFSA funds. Generally, you can use the following “qualified” investments:

  • Cash, savings, and term deposits (GICs).
  • Securities listed on a designated stock exchange e.g. stocks and ETFs.
  • Bonds including federal and provincial government, and corporate bonds.

There are some others e.g. gold and silver bullion, small business corporation shares, etc. which do not apply to most people.

Some types of investments are prohibited in a TFSA, you can read about them here.

From the general TFSA investment options listed above, your choice may be determined by your:

  • Investment objectives e.g. are you investing for a long term goal (e.g. retirement), short-term savings (e.g. emergency fund, wedding, car), or other purposes?
  • Level of risk tolerance.
  • Investment knowledge and confidence with self-directed investing.
  • Overall asset allocation in your investment portfolio.
best tfsa investments for canadians

Traditional Low-Risk TFSA Investments

The most popular assets for TFSA accounts are savings accounts and GICs.

Best TFSA Savings Accounts in Canada

Savings accounts are an ideal option if you are likely going to need your funds within a year or so. Any interest income you earn remains 100% tax-free. 

For example, if you are saving towards a home downpayment or your wedding, you want some assurance that your funds are going to be accessible on short notice.

If your money is invested in the stock markets, you are exposed to the ups and downs that may mean significant losses (or gains) when you need the money.

Your best bet is a high-interest savings account that pays you returns in excess of the inflation rate. Unfortunately, most big banks fail in this area. 

Our #1 choice at Savvy new Canadians is Tangerine. For a list of other TFSA savings account options, see our list of the best TFSA savings accounts in Canada.

Best TFSA GICs in Canada

A Guaranteed Investment Certificate (GIC) may be ideal if you are looking to save for a short to medium-term (1-5 years) in a very low-risk asset.

GICs can be laddered to provide income at specific times and they generally offer rates higher than a savings account for the same duration.

Your principal is guaranteed so you don’t have to worry about going belly-up (currently this is applicable to GICs with a term length up to 5 years). Typically, the longer the term (i.e. the number of months or years), the higher the interest rate earned.

Note that you may be penalized for cashing out your GIC before its term expires if it’s a non-cashable GIC. Earnings on a GIC are also not taxed in a TFSA account.

Compare the best GIC rates in Canada here.

Self-Directed TFSA Accounts

Self-directed TFSA investing can save you money in lower management fees and higher returns if you know what you are doing. With a self-directed TFSA account, you determine what assets you want to hold and in what proportions.

Using a discount brokerage account, you can buy and sell stocks, ETFs, mutual funds, and other assets easily from the comfort of your home on most devices.

Managing your own portfolio without the assistance of “professionals” can be challenging. You will need to:

  • Understand asset allocation and the dynamics of risk and return.
  • Be comfortable with portfolio rebalancing.
  • Be aware of fees as trading fees/commissions do add up if you are trading frequently. More on this later.

Using ETFs in a TFSA

Exchange-Traded Funds (ETFs) are similar to mutual funds, however, they are usually cheaper and trade like common stocks on an exchange. ETFs offer a great way to diversify your investments since a single ETF may hold thousands of stocks or bonds.

Similar to index funds, an ETF can be designed to mirror the performance of an entire index, market, or industry sector.

The increasing popularity of ETFs vs. mutual funds is mostly due to their lower MER. The average equity mutual fund costs more than 2%, while you could easily find an ETF that costs less than 0.25% and provides similar coverage or even better historical returns.

The fact is that paying more in fees does not necessarily translate into better returns. The opposite is often true.

You can easily purchase ETFs using a discount brokerage e.g. Questrade or Wealthsimple Trade (no trading fees or commissions).

ETF providers like Vanguard, iShares, and BMO have taken ETFs a step further so you don’t even need to worry about rebalancing with their introduction of All-in-One ETF Portfolios.

Vanguard’s all-in-one ETFs include:

  • Vanguard All-Equity ETF Portfolio (VEQT)
  • Vanguard Growth ETF Portfolio (VGRO)
  • Vanguard Balanced ETF Portfolio (VBAL)
  • Vanguard Conservative ETF Portfolio (VCNS), and
  • Vanguard Conservative Income ETF Portfolio (VCIP)

Investing TFSA in Stocks

Trading stocks using a discount brokerage is easy. Heck, some brokers like Wealthsimple Trade even allow you to buy and sell stocks for free (i.e. no trading commissions) using your TFSA account.

Investing in stocks is a risky business and your returns are not guaranteed. However, historical data shows us that you could enjoy significantly higher long-term returns. Between 1970 and 2015, the Canadian stock markets provided an average annual return of 10.4%.

Four things you should note if you decide to invest in individual stocks for your TFSA:

  • Capital losses cannot be used to offset capital gains in a TFSA account.
  • Holding an adequately diversified portfolio is impossible if you are invested in a handful of stocks. A preferred alternative is to use diversified equity ETFs.
  • Foreign dividend income provided by blue-chip stocks is subject to a withholding tax (15% for U.S. dividend stocks) when they are held inside a TFSA.
  • Day-trading stocks, ETFs, or anything for that matter in your TFSA will get you in trouble.

TFSA Mutual Funds

Mutual funds have traditionally been a very popular way to invest – whether it be in an RRSP, TFSA, or non-registered investment account. They are easy to use. Simply walk into your bank, answer some questions, and they set you up with some mutual funds.

The problem with this approach is that you may end up paying your fund manager a lot of money in fees – over 2% per year the last time I checked.

I generally don’t recommend investing in expensive mutual funds if you can avoid them since there are now better options available.

Index funds are similar to mutual funds. However, they are passively managed and are cheaper. Some of the popular index funds available in Canada are the:

  • TD e-Series Funds
  • Tangerine Investment Funds (one-fund solution)
  • RBC Index Funds
  • Scotiabank Index Funds
TFSA investments in Canada

Robo-Advisor TFSA Accounts in Canada

Online wealth managers aka robo-advisors offer TFSA accounts using low-cost ETFs. Robo-advisors are an excellent option because they offer investors access to professional money management at a lower fee compared to the traditional wealth management services available through bigger financial institutions.

Also, you don’t need a lot of investment know-how to invest with them.

Robo-advisors ask you a series of questions to determine your risk tolerance and investment objectives and then match you up with a portfolio that meets your needs. Unlike in a self-directed TFSA, they help you with rebalancing your portfolio when required. 

On the fees side of things, robo-advisor fees are much lower, at an average of 0.75% (including the management fee and ETF MERs).

Wealthsimple is Canada’s most popular robo-advisor and we have previously rated them at 4.9/5 in this review.

You can compare the services and offerings provided by the various robo-advisors in Canada here.

If you are interested in how their fees compare, you can read this robo-advisor fees post.

Conclusion

To recap, if you are looking to save money for the short term, a high-interest saving account like Tangerine (2.75% promo for 5 months) or similar is an option.

For medium to long-term investment plans, you can use a robo-advisor like Wealthsimple (get a $50 cash bonus with our link) to save on fees and invest in ETFs while you sit back and watch your account grow.

If you’d rather be in the driver’s seat, you can use a discount brokerage account like Questrade or Wealthsimple Trade to buy and sell investment assets in your portfolio.

Common TFSA FAQs

Here are answers to some of the questions I’m frequently asked in relation to TFSA investments.

What is the TFSA contribution room for 2020?

The TFSA limit for 2020 is $6,000. If you had a TFSA  and have been eligible to contribute since 2009, your total contribution room is $69,500. Here is some information about TFSA contribution rules. The contribution limit for 2019 was also $6,000.

Can I have US stocks in my TFSA?

Yes, you can purchase Canadian, US, and other international stocks in your TFSA account. To purchase individual stocks, you will need a discount brokerage account such as Questrade or Wealthsimple Trade. Currency exchange fees may apply.

Is the TFSA really tax-free?

Interest income, dividends and capital gains earned in a TFSA are tax-free. With that said, taxes may be due if you invest in foreign stocks that pay dividends (effectively a 15% withholding tax) or contribute to a TFSA while you are deemed a non-resident of Canada (1% penalty tax per month). Excess TFSA contributions are subject to a 1% penalty every month until they are withdrawn.

Can you lose money in a TFSA?

Yes, investments in the financial markets are exposed to various risks. However, TFSA contributors enjoy some protections including:
– Funds in TFSA savings or term deposit account may be protected up to $100,000 by the Canada Deposit Insurance Corporation (CDIC). For deposits in a credit union TFSA, you could get up to 100% protection regardless of the amount.
– Investments (stocks, mutual funds, ETFs) are protected up to $1 million through the Canadian Insurance Protection Fund (CIPF).

When can I withdraw from my TFSA?

Any time. When you withdraw money from your TFSA, you can recontribute it in future years.

What happens to a TFSA when someone dies?

After death, the TFSA goes to either a named successor holder, beneficiary, or the estate of the deceased contributor. 

A Successor Holder (e.g. a spouse) can simply take over the TFSA and transfer it to their own. They get the money tax-free. A beneficiary (spouse, child, or anybody really) can contribute the value of the TFSA to their own account. The estate receives the proceeds if no successor holder or beneficiary is named. Read more about TFSA disposition after death.

How much money do you need to open a TFSA?

$1. Seriously. A robo-advisor like Wealthsimple allows you to open a TFSA account and start investing with as little as $1. You can use our special sign-up link to invest up to $10,000 for free for 1 year.

Is the TFSA an investment account?

The TFSA account is what you make it. You can use it to invest for retirement or turn it into your savings piggy bank (not recommended). For investing purposes, you can purchase stocks, ETFs, mutual funds, GICs, and many other assets.

What investments can be held in a TFSA?

Stocks, ETFs, mutual funds, savings, GICs, bonds, and pretty much any other investment you can hold in an RRSP.

What is the TFSA contribution room for 2020?

$6,000. We predict that the TFSA contribution limit for 2020 will remain unchanged at $6,000 based on how it is indexed annually.

How many TFSAs can you have?

You can open multiple TFSA accounts in different financial institutions and contribute to them as long as you have contribution room.

How do I know how much money I have in my TFSA?

You can check your CRA My Account to find out (may not be up-to-date) or call CRA at 1-800-267-6999.

Do I claim my TFSA contributions on my tax return?

TFSA contributions are from after-tax dollars. No, you can’t deduct your TFSA contributions from the taxable income on your tax return.

How is the TFSA different from an RRSP?

Here is a detailed TFSA vs. RRSP guide that highlights their similarities and differences.

Best TFSA Investments for Canadians