Investing your TFSA

Sometimes, the TFSA is misunderstood.  One common misunderstanding is how many people think the Tax Free Savings Account (TFSA) is just a savings account.  After all, the ‘SA’ in TFSA stands for ‘savings account’.  If the TFSA was called the Tax Free Investment Account (TFIA), would people then mistake it for just a savings account with no tax?  Would more people invest in their TFSA differently?

What can you invest in your TFSA?

The bottom line is investment options you have for the RRSP, 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:

Safer alternatives

  • Savings Accounts – 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 taking the TFSA out, the TFSA is a great place to save to spend.  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 high interest savings accounts might be a great way to keep things liquid.
  • Guaranteed Investment Certificates (GICs)GICs are also a safe way to play but you might get a higher interested 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 which is important the closer you get to retirement.
  • BondsBonds 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 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

  • Mutual funds – 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 manage 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, colors, 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 are the management fees investors pay as a percentage of the asset value.
  • Segregated fundsSegregated 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 that 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 most are passive where there is no manager buying and selling investments.  Instead they typically mirror indexes or benchmarks.  As a result, ETFs have exceptionally lower fees than mutual funds.  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 are risky but some choices are riskier than others.

  • Individual stocks – 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.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites and Clearpoint Benefit Solutions.

18 Responses to Investing your TFSA

  1. 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.

  2. 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.


  3. 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.

  4. HI Jim,

    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.

    • Hi Ann

      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.


  5. 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.

  6. 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.

  7. 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.

  8. 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?

  9. 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?

  10. 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.

  11. 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?)

Leave a reply