Table of Contents
- The best TFSA savings accounts in Canada
- What is a Tax-Free Savings Account (TFSA)?
- Should I use a TFSA or an RRSP?
- Which type of TFSA might be right for me?
A Tax-Free Savings Account, or TFSA, is a savings vehicle available to Canadians aged 18 and up who have a valid social insurance number (SIN). It was launched by the federal government in 2009 as a way to encourage savings.
As the name suggests, TFSAs offer a tax break on contributions—meaning that, unlike with a regular savings account or non-registered investment account, what you earn inside your TFSA isn’t taxed, even when you make a withdrawal. TFSAs* are flexible, too, allowing you to hold cash, Guaranteed Investment Certificates (GICs*), stocks, bonds, exchange-traded funds (ETFs) or mutual funds, so you can tailor your account to different financial strategies and goals. The TFSA contribution limit for 2020 is $6,000, but keep in mind that if you qualified to make a contribution in 2019, but didn’t that contribution room is still available to you. For those who turned 18 in the year 2009 or prior, the lifetime contribution limit is $69,500.
The best TFSA savings accounts in Canada for 2020
Read on to learn the basics about TFSAs, and browse the best TFSA rates and accounts for Canadians to determine which account suits your needs best. These accounts have been ranked based on their individual rates of return, security and other benefits.
Alterna Bank TFSA eSavings Account
For those comfortable banking online, what Alterna lacks in brick-and-mortar branches, it makes up for with an above-average 2.25% interest rate. With no fees, no minimum investment, and simple “me-to-me” transfers that allow deposits whenever there’s a bit of extra cash around, this TFSA makes it easy for students to sock away savings. Because the account is CDIC-insured up to $100,000, you can sleep well knowing your principal remains safe.
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 have access to in-person banking at a bricks-and-mortar branch—the CIBC Tax Advantage Savings Account might be the right choice. And if you open a new account by March 31, 2020, you’ll receive a promotional interest rate of 2.75% until March 31, 2020, provided you do not withdraw funds prematurely. (After the promotional period, it drops to the regular rate, which has been in the vicinity of 1.0%). There are no fees and the minimum investment is only $25.
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 2.35%, 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.)
Peoples Trust 1-year Tax-Free GIC
Based in Vancouver, Peoples Trust has been in business for three decades, and remains a smaller player on the financial products scene—but it has one of the best GIC rates, although a minimum $1,000 investment is required. The GIC is not redeemable until maturity, meaning you won’t be able to access your money until the 1-year-term is up, but in exchange you get a juicy 3.00% rate, zero fees and CDIC insurance protection.
Tangerine Tax-Free Savings Account
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 five 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. It’s worth noting that if you decide to transfer your TFSA to another institution (other than Scotiabank), you’ll be charged a $50 fee—so make sure switching makes sense before you make the move.
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 picking 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, although it isn’t cashable, 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.
If the stock market climbs and you don’t have anything invested in it, your portfolio will miss out on all the gains. If you aren’t reliant on income-earning investments and have the stomach to weather stock market turbulence, Questrade offers a TFSA with no fees for opening or trading and super-low management fees so more money stays in your account.
Want help choosing your investments? Choose from the 12 Questwealth Portfolios designed to match your risk tolerance and affinity for socially responsible investments (SRIs). For example, the most conservative portfolio is 80% allocated to fixed-income and cash investments; if you choose to invest in this portfolio, your money is not guaranteed, as it would be in a GIC or savings account, but it does have diversification. Your portfolio is automatically rebalanced to retain that diversification, plus there is a very low management fee of 0.11% to 0.14%, which allows stock market gains to have a bigger positive impact on your portfolio over time. (Keep in mind that when stocks fall, your portfolio will be negatively affected.)
Questrade’s TFSA has no annual account fee (except the management fees if you hold a Questwealth Portfolio), and no opening or closing fees. As a final bonus, it allows you to hold both Canadian and U.S. stocks in the account at the same time.
Wealthsimple made a name for itself by offering a simplified and easy investing platform for a low management fee that includes many of the most typical services such as auto-deposits, dividend reinvesting, and automatic rebalancing. The result is an effective and affordable tool for those wanting to put their TFSA money into investments and exchange-traded funds (ETFs). And if you’re looking for a TFSA that pays a higher rate on cash, Wealthsimple may have your back. They offer a 2.40% interest, which is higher than a big bank’s regular savings account. The account has no minimum, unlimited free transactions, no low-balance fees and it is insured up to $1,000,000 by CDIC.
Wait, what, exactly, is a Tax-Free Savings Account (TFSA)?
A tax-free savings account (TFSA) 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 ($6,000 for 2020), 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. While you can put cash money into a high-interest savings account* or other savings vehicle within a TFSA, it can also hold investments like stocks or bonds, mutual funds, GICs* or ETFs*. In this way, a TFSA is similar to a Registered Retirement Savings Plan (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 any withdrawal, you regain that exact amount of contribution room inside your TFSA, up to your lifetime limit.
For retirees or others whose benefits may be clawed back if their income exceeds a certain level, 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).
What is a TFSA contribution limit?
Your TFSA contribution limit is the amount of money you can place in TFSAs without penalty. TFSAs were introduced to Canadians in 2009 with an annual limit of $5,000. This meant that Canadians could put up to $5,000 away in TFSAs every year. Even better, unusued contributions roll over into following years. In 2013, the limit was raised to $5,500, and in 2015 it jumped to $10,000. The limit was reduced to $5,500 again for 2016; then, in 2019 it increased slightly to $6,000 where it’s remained for 2020. This means that if you have never contributed to a TFSA, you would have $69,500 in tax-free contributions available to you.
Should I use a TFSA or an RRSP?
The main difference between a TFSA and an RRSP is that the former is a tax-free savings account and the latter is a tax-deferred savings account. This means that when you withdraw money from a TFSA, you are not taxed. With RRSPs, the money is taxed on withdrawal.
With this in mind, you might be wondering why anyone would choose an RRSP. The answer lies, again, in the tax structure. When you put money into a TFSA, you do not receive a tax credit. But you do with an RRSP, and when you use it correctly, this credit can be a powerful tool. If, for example, you earn enough money to just break into a higher tax bracket, you could contribute to an RRSP and get an exemption that would bring you back into a lower bracket. Very likely, you’ll be in a lower tax bracket when you need to withdraw those RRSP funds in retirement, resulting in a lower lifetime tax bill.
As with all things financial, it’s usually a good idea to diversify. Both TFSAs and RRSPs have their uses as investment products.
Which types of TFSA is 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.
‡MoneySense.ca and Ratehub.ca are both owned by parent company Ratehub Inc. We may be partnered with some financial institutions, but this does not influence the Best Canadian Tax-Free Savings Accounts in 2020 rankings. You can read more about this in our Editorial Code of Conduct.
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