Investing your TFSA
Every week, I talk to a lot of people who don’t really understand the benefits of a TFSA. One common misunderstanding about the TFSA is many people think the TFSA is just a savings account. After all, the ‘SA’ in TFSA stands for ‘savings account’. I wonder if the TFSA should have been called a Tax Free Investment Account so more people would invest in their TFSA differently?
What can you invest in your TFSA?
The bottom line is that the investment options you have available for the RRSPs are the same investment options you also have for the TFSA. You can choose from a wide range of investment options. Here’s a basic primer explaining some of the most common choices for investing your TFSA:
When the TFSA was first introduced in early 2009, I remember the barrage of advertisements from financial institutions promoting savings accounts as the prime investment vehicle for the TFSA. High-interest savings accounts are perfect investments for a TFSA especially if you need liquidity and safety. Since there is no tax consequence to withdrawing money from the TFSA, the TFSA is a great place to save to spend later. If you are planning to buy a car or do some renovations or even go on a trip, the TFSA can be a great place to invest some money and a high-interest savings account might be a great way to keep things liquid, accessible and safe.
Guaranteed Investment Certificates (GICs)
GICs are also a safe way to invest in the TFSA but you might get a higher interest rate than a saving account by investing for a longer period. Basically, with a GIC you decide how long you want to put the money away for (like 1 to 5 years) and usually the longer you are willing to commit, the higher the interest rate you will get. Essentially GIC investors lend the financial institution money with the plan that they will get their money back plus some interest. GICs are ideal for conservative investors wanting to play it safe instead of investing in the ups and downs of the stock market.
Bonds come in many shapes and sizes. There are government bonds and corporate bonds. There are short term bonds (less than 5 years) and long term bonds (as long as 30 years). Bonds are similar to GICs in that the investors lend money with the idea they will get their money back plus interest. The difference between a bond and a GIC is that bonds can be traded on the open market before maturity where a GIC is typically locked-in for the entire term. Because the bond can be traded or sold, bond values can fluctuate and could increase or decrease in value. Some investors like bonds because they can be cashed at any time but there is some risk in that the value of a bond could go down. Although bond prices could fall, they are still considered to be safer types of investments.
Adding some risk
For investors who want to seek higher returns than savings accounts, GICs, and bonds, it may be a natural progression to shift to mutual funds. Mutual funds are really pools of money where investors bring their money together and give a mutual fund manager the ability to buy and sell investments on a larger scale. Just like bonds come in all shapes and sizes, mutual funds come in all shapes, sizes, colours, options and prices. There is no shortage of mutual funds with over 7000 choices. You can find a mutual fund for pretty much any investment need. Mutual funds are riskier because they have no guarantees and can fluctuate in value. There are conservative mutual funds as well as aggressive ones. Choosing the right mutual fund can be very confusing and complicated. One of the biggest criticisms of mutual funds is the higher management fees investors pay as a percentage of the asset value.
Segregated funds (Seg funds) are like mutual funds except they are offered by insurance companies. Since segregated funds are offered by insurance companies, seg funds have some unique benefits over mutual funds. They can provide ‘insurance’ guarantees on the capital at death or maturity and some have reset privileges. It’s important to keep in mind these benefits do not come free. Segregated funds tend to have higher management fees than mutual funds.
Exchange traded funds (ETFs)
Exchange traded funds are similar to mutual funds and seg funds from the perspective that they are pools of money that allow investors to access a portfolio of investments. ETFs differ in that they are traded like stocks on a stock exchange. ETFs tend to have lower fees than mutual funds and segregated funds. Some of the most popular ETFs are passive where there is no manager buying and selling investments. Instead, they typically mirror indexes or benchmarks. The ETF market has come a long way and there is more choice than ever and many do-it-yourself investors like investing their TFSA in ETFs.
In the case of mutual funds, Seg funds and ETFs, you can invest in safer, fixed income options like bond funds or bond ETFs. Not all choice is risky but some choices are riskier than others.
Related article: 3 ETFs I own for income
With your TFSA, you could also buy individual stocks. Those that did so back in early 2009, bought stocks at rock bottom prices and are looking at great gains inside the TFSA. As cumulative TFSA limits increase and TFSA portfolios get bigger and bigger, there will be more people investing directly in stocks. There is a certain economy of scale to buying individual stocks so it can be less cost-effective (but not impossible) to buy a lot of stocks with a few thousand dollars.
While this list is not exhaustive, it does represent the types of investments that most Canadians will use for their TFSA. Some prefer to work with guaranteed investments and others will seek higher returns despite having some risk attached to it. Choosing which type of investment will really depend on your time frame, personal objectives, involvement, experience, risk tolerance and financial position. The great things about the TFSA is the universal appeal and benefit to different types of people.
As contribution limits grow, you will start to see more and more opportunities available in the market place from different companies. Regardless, it’s important to be aware of how you are investing your TFSA.
How to invest your TFSA?
Talk to a Bank or Financial Advisor
If you are not sure where to start, you will likely want to talk to a financial advisor or a bank to get the process rolling. One of the problems that I have seen in the past is that if you go to a bank to open a TFSA, the default is often a savings account unless you ask about other options.
Because the greatest benefit of the TFSA is the tax-free growth, you might want to consider some investments that have greater growth opportunity.
Open a trading account and do it yourself
If you prefer to try investing on your own, you can open a trading account. I happen to use Questrade for my trading account for both my RRSP and my TFSA as they allow you to buy ETFs commission-free. There are lots of other options available through your banks. Many Do-It-Yourselfers will typically buy ETFs or individual stocks.
Robo Advisors are newer options that help investors lower the fees but still provide advice and help on a service on-demand model. All the Robo Advisors in Canada allow you to open up a TFSA account option. Robo-Advisors will typically manage investment portfolios using low-cost ETFs to keep the fees as low as possible.
Related article: Battle of the Best Robo-Advisors
As you can see, there is no shortage of investment options for the TFSA. Think about how you are going to use the TFSA before you invest. If you are going to use the TFSA as an emergency account or a future spending account then you might want to go to the bank and look at safer options. But if you want to really take advantage of the tax-free growth in the TFSA, then look to invest the money through either a trading account like Questrade or through a Robo-Advisor.
I think that the financial industry wasn’t very prepared for all the different options available in the TFSA so they pushed the high interest savings account as “the best” option. They likely did not want the administrative headache of opening a bunch of investment accounts with only $5k.
Most still charged their $50 per year fee because the account was not at the minimum threshold of $25k. Well, how the heck are you supposed to get there when you can only invest $5k at a time?
Thankfully banks have now embraced the TFSA and it’s many different options, and they consider your TFSA as part of your overall investment portfolio and waive the admin fees.
The issue is the word “Savings” in the title of the account so people put cash or cash equivalent products in their account.
25K threshold? TDDI is 15K so is RBC, etc. Questrade, etc are $100 so this argument makes zero sense.
Free accounts for retail investors at any bank for their mutual funds or paper products
Good post. I totally agree that once TFSA contribution limits start getting closer to $25,000 and then beyond, banks are going to start marketing these accounts differently; at least more.
What is your personal preference Jim? What do you use your TFSA for? Curious.
I opened my TSFA with a brokerage account and now have about $33,000.00 in it – $15,000 in contributions and the rest from trading. Although I can’t sell short in it, I can trade options.
Congratulations. Sounds like you did well despite tough markets.
Interesting article, thank you for opening up my mind. I’m overwhelmed and feel intimidated in regards to investing period. However I have a TSFA account and have contributed every year. I have an opportunity to lend a well established company some money for a 5 year term and the return will be much better than my interest in the TSFA account. If I use the money in my account can that money I earn be tax free?
I hope this made sense. Thanks for your time
Great question Ann. TFSA’s are exactly what Jim called them Tax Free Investment Accounts. All money made within the account is earned tax free. This kind of account is very comparable to the US version, the Roth IRA.
Hearing you say you are intimidated by investing and then saying you have an opportunity to invest with a well established company for a much higher return. This screams out SCAM! – Fraud.
Please be very careful.
If you open a brokerage account with (TD Waterhouse as an example) you could get 4-7%. in pretty secure investments.
Example – Boston Pizza units (BPF.un-T)
A&W units (AW.un-t), Canadian oil sands (COS-t).
Also any of the big 5 bank shares would be fine and they pay a dividend of 3.5 to 5 %. Dividends are tax preferred and depending on your income they could be tax free. All of these are available in a TFSA account and of course would then be definitely tax free.
Please tell us the name of the “well established” company you are considering.
OP indicated she is intimidated by investing so you then go on to recommend individual securities? Two consumer quick serve restaurants and oil sands… ummm ok.
Banks with dividends….. it’s not 1999 dividend investing…. its a registered account, what does anyone care about favorable tax treatment.
Passive index investing is what the OP should consider. Simple and proven long term history.
Before the OP listens to any unsolicited internet advice perhaps she should be investigating if more people are piling money into individual securities or passive index investing with ETF’s.
who is qualified to open TFSA? A low income earner can open? I am in the low income earner group. My annual income is below $30,000 and now extra cash available but am I qualified to open? or it is better not open since TFSA is for high income earners with extra cash available. Low income earner will be disadvantage for opening TFSA.
Please help me.
Here is what the government says: “Any individual who is 18 years of age or older and who has a valid Canadian social insurance number (SIN) is eligible to open a TFSA.” Income level is not a qualifier for who can or cannot open a TFSA.
In planning for your retirement or savings for long term TFSA’S are the only way to go…. I Suggest Growth Stock Mutual funds such as CIBC’S NASDAQ INDEX (CIB520)… $500.– to start or $25.00 per month… average 5 yr return is 22% last year was over 30%… over a hundred companies involved in one fund… (the top 100) ..
Zero income limits… if your employer matches rrsp deductions … contribute up to the match ONLY… then max out tfsa yearly limit currently $5500.00 per person. all contribution room is available back to 2009 … so you could contribute up to just over $70,000.00 , continue matching TFSA to the max each year. Any available money over that you should contribute into RRSPS but YOU pick the FUND, if someone else picks the fund – they probably don’t have your interest at heart… or they are thinking of the commission… YOU PICK… NO LOAD FUNDS like the one i mentioned earlier… since the market has averaged around 12% per year growth since 1930’s… why accept less.
TFSA is ideal for low income earner. You don’t get the large tax delta that higher income earners do. Further, TFSA is not means tested, so if you required GIS etc in the future it doesn’t count as income.
Ignore the nonsense about purchasing mutual funds. 95% of mutual funds underperform the index and in Canada mutual funds have outrageous MER’s attached to them. Asset allocation or index ETF’s. Mutual funds…. geesh, the 90’s are over.
Re Dave’s remarks above re CiBCs Nasdaq as an investor vehicle in the TFSA, don’t TFSA rules state US investments are subject to US Witholding tax?
Sorry, I meant Bernie’s comment about re the Nasdaq not Dave’s
TFSA is good for everyone regardless of income. It can be particularly good for low income people because the revenue it produces will not reduce any GIS.
TFSA is also good for those in OAS clawback territory (71-115 K) because TFSA income is not taxable.
If you have some money to invest close to retirement while working where would you put it in a TFSA for some growth-the savings vehicle is nothing as you know.
Can your tfsa invest in real estate? That is, buy a property and then flip it for profit? Can it be the benficiary of a trust which purchases real estate? If so, what are the rules for such a transaction?
Hello… how can i maximize my tfsa account?we have a tfsa variable for 2 years and will be maturing on march 15 2017… with a 2.15 percent locked i terest.. how can i maximize my tfsa or get higher return?
I have a considerable amount in my TFSA as we put in some stocks in a company that appreciated considerably since 2009. Could I purchase a rental property with the capital from my TFSA and have the rental income generated considered tax free under the TFSA rules?
I have done some research and haven’t been able to find a straight answer. I know I could hold REIT’s but could I hold my own property (no mortgage) within my TFSA.
Did you find an answer?
The short answer is no.
I have a question!!! If I have money in my tax free savings account and transfer this into a tax free gic, does it count as a new contribution? (If you do it yourself with online banking within the same bank?)
I started with a high interest savings account paying 3% but as the interest rates kept falling I transferred it to an investment account. It didn’t take long to reach $100K. I have withdrawn half of that for various projects over the years. I still have close to $70K in my TFSA and $45K contribution room available. High paying dividend stocks with DRIP is the key. I prefer an active TFSA account rather than buying and holding.
One problem for a young man I’m helping out as a friend, is that Employer savings plans have not yet been updated to include TFSAs. The Employer will match contributions to an RRSP, but not TFSA.
During these low income years in his early 20s it make more sense (in my opinion) to contribute to a TFSA and let his RRSP contribution room build up and use it when income is higher and the tax advantage is greater.
But we don’t want to lose the Employer contribution..
Keep checking with Employer, if a unionized work environment have him contact his union negotiating committee as other employers offer this.
Would it be a good idea to buy dividend paying stocks inside TFSA or rather in an RRSP?
Thinking of tax consequences later.
I just realized that wasn’t a smart question….No tax payable when withdraw from TFSA…
RRSP is a good choice to buy dividend paying stocks?
Keep your Foreign investments in RRSP as you will receive better tax advantages on the gains. Speculative stocks in TFSA can create a huge amount of contribution room but be careful with foreign investment in TFSA as it is not recognized by some foreign tax treaties. Canadian dividend income in non- registered accounts as it has best tax advantages. Some bonds etc in registered accounts for diversification and ability to take advantage of crashes in equity or simple protection if drawing an income. Jim may have an article on how to look at best Tax advantages of all accounts to create your portfolio.
I am wondering when this article was written – as one of the comments writes:
we have a tfsa variable for 2 years and will be maturing on march 15 2017
I have approx. $70K so far, and I want to purchase an annuity inside the TFSA account as soon as I have $100K. BUT…. all insurance companies I’ve contacted tell me it’s not possible. Meanwhile the CRA website tells me annuities are indeed a valid investment for TFSA accounts… Help??!
hi Jim…I have a tfsa and an rrsp with questrade but there is no mention of waiving the fees for an ETF. When I ask for a quote on an ETF it shows the regular fee applied.
Its a good advice Jim. RRSP or TFSA both are excellent retirement saving plans that save our retirement income taxes and also give us a peaceful old age. RRSP plans have some unique benefits that other plans. Their benefits are,
1.The income earned in your RRSP is not taxed until it is withdrawn
2. RRSP is tax sheltered income growth
So, above are major benefits, however, TFSA plan is good and effect based on income bracket! Its like Registered vs Non-Registered saving accounts!
Amazing how to words confuse the living hell out of people. Savings Account points so many of my co-workers to thinking of this as a Savings Account, and thus they are quite happy with really crappy returns.
Be wary that you can’t also, day trade in your TFSA either, or the CRA will talk to you.
A question about TFSA contribution room and DRIPs.
I understand the TFSA contribution limit and what a DRIP is.
Does a monthly DRIP re-investment count towards your contribution limit. I’m assuming it does, just want to be sure.
IE, on Jan 1 (after the increase in contribution limit), I have $20,000 in contribution limit left in my TFSA and I start a DRIP reinvesting $1020 in Jan, $1036 in Feb, $1052 in Mar, etc, by Dec there will be a total of approx $15,000 re-invested.
Am I wrong to assume that at the end of Dec, I would still have approx $5,000 left over contribution room to contribute into?
Or am I totally wrong here on the DRIP counting towards my contribution limit.
If so, then by Dec I will still have $20,000 in contribution room.
Thanks for the help.