This year, the tax-free savings account (TFSA)* marks a decade of existence in Canada, so now’s the perfect time to take a fresh look. Introduced as a way to help Canadians save, the TFSA allows a tax break on contributions, meaning what you earn inside the account isn’t taxed, even when you make a withdrawal. TFSAs* are flexible, too, allowing you to hold cash*, GICs*, stocks or bonds, mutual funds, so you can tailor your account to different financial strategies and goals. Read on to learn the basics about TFSAs, and discover the best TFSA rates and accounts for Canadians.
The best TFSA savings accounts in Canada
- motusbank TFSA Savings Account — Best TFSA for online banking
- CIBC TFSA Tax Advantage Savings Account — Best big-bank TFSA
- motusbank 5-year non-redeemable TFSA — Best TFSA for risk-averse savers who can lock in for a longer term
- TD 5-year Canadian Banking & Utilities GIC — Best for investors with a medium risk tolerance
- Tangerine TFSA — Best promotional TFSA rate
Wait, what exactly is a TFSA?
A tax-free savings account is an investment account that’s sponsored by the government. If you’re a Canadian over the age of 18, you’re eligible to save or invest in a TFSA up to a certain amount annually (increased to $6,000 in 2019), and unused contribution room can be rolled over into future years. A TFSA is a tax shelter; it gives every Canadian of the age of majority some savings or investment room to earn, tax-free.
Some confusion arises from the fact that, despite the name, not every TFSA is a traditional savings account*. It can be—you can put cash money into a high-interest savings account* or other savings vehicle within a TFSA—but it can also hold investments like stocks or bonds, mutual funds, GICs* or ETFs*. In this way, a TFSA is similar to an RRSP, with the exception that with the TFSA you do not pay tax on the earnings after you make a withdrawal. On the other hand, where you can claim RRSP contributions as deductible on your income tax return, that perk isn’t applicable to TFSA contributions.
TFSAs are incredibly flexible. You can use them to save for retirement (handy if you’ve used all your available RRSP contribution room), but also for a car, a wedding, a vacation or something else entirely. Simply purchase the TFSA product of your choice and let it earn. When you’ve accumulated the amount you want, you’re free to withdraw it, without penalty and without paying tax.
Let’s break this down: If you invested $1,000 in a TFSA and that money grew to $5,000, you would have earned $4,000 tax-free! After you make a withdrawal, you regain that exact amount of contribution room inside your TFSA, up to your lifetime limit.
For retirees or others whose income may be tied to benefits, there’s an additional bonus: money withdrawn from a TFSA does not count as income, so it will not negatively affect Canada Pension Plan payments or other income-tied benefits.
It’s one of the most beneficial and flexible financial products available, and without cost as long as you stay within your contribution limits (over-payments will incur a 1% per month charge on the excess).
Which type of TFSA might be right for me?
The very best TFSA for your particular needs will depend on the following factors: your savings goal; your timeline; and your appetite for risk. Some TFSA savings accounts* (as opposed to mutual funds, for example) offer strong promotional introductory rates which might help kick-start an account, but in general they’re best for risk-averse investors trying to reach medium- to long-term goals. Your personal comfort with risk will inform the type of TFSAs you invest in. TFSAs in the stock market* are inherently riskier than GICs*, for example, and may require substantial trading knowledge. Other factors to consider include whether there are any fees or account charges.
Canada’s best TFSA accounts
Best TFSA savings account for an online bank: motusbank TFSA Savings Account
Don’t let the unfamiliar name fool you: Although motusbank is a relative newcomer in the list of Canadian online banks, it’s owned and operated by Meridian Credit Union, which has been around for 75 years.
With a regular interest rate of 2.5%, the motusbank TFSA Savings Account offers a high rate of return and zero risk. There is no minimum balance, no monthly fees and deposits are insured by CDIC up to $100,000. (Note that motusbank accounts are not available for Quebec residents.)
Best TFSA savings account for a big 5 bank: CIBC TFSA Tax Advantage Savings Account
The big banks tend to pay out far less in interest than the online banks, but for some investors—those who already bank at CIBC, or those who prefer to deal with a brick-and-mortar branch—the CIBC Tax Advantage Savings Account might be the right choice. This account pays 1.05%. There are no fees and the minimum investment is only $25.
Best for risk-averse investors who can commit to a 5-year plan: motusbank 5-year non-redeemable GIC
Investors who are extremely risk averse but who can commit to placing their money in an account for a longer period of time can take advantage of the security and higher interest rates of a TFSA GIC. Rates for GICs vary according to type, length and terms, but we like the 5-year non-redeemable from motusbank. Although you’ll have to lock in the money for a 5-year term, you’ll receive a healthy 3.25% in interest and you can rely on CDIC coverage to protect your investment. There are no fees or minimums.
Best for investors with a medium tolerance for risk: TD 5-year Canadian Banking & Utilities GIC
In addition to relatively safe investments like savings accounts and GICs, TFSAs can also be invested in riskier products with the possibility of a higher reward. When you’re dealing with stocks there are a million and one variables to consider—so many, in fact, that it’s not possible to say which is the absolute best. We’ve chosen the TD Canadian Banking & Utilities GIC because it has an excellent potential return of 25% over 5 years with a guaranteed minimum return of 2.75% interest, and it offers 100% protection on the principal. There are no monthly fees, and the minimum investment is $1,000 for a TFSA.
If you’re looking for a quick way to bump up a bit of savings, and you’re not an existing Tangerine client, consider taking advantage of their promotional 2.75% rate for six months. There are no fees or minimums, and after six months the interest rate drops to 1.10% (not the highest, but certainly not the lowest, either).