Despite its name, you can hold a variety of investment types inside a Tax-Free Savings Account—not only savings. This guide walks you though several options.
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If you’re using your tax-free savings account solely to deposit cash over the long term, Certified Financial Planner Trevor Kearns says you’re not using the TFSA to its full potential.
You have more options (and better potential gains) than that. Kearns tells many of his clients to mentally drop the “A” in TFSA and to think of it as more of a “portfolio” than an “account.” Many will deposit up to $6,000 per year (or up to $69,500 cumulative contribution, if they’re catching up from previous years), into a registered savings account to benefit from fact their money will earn interest tax-free, and can be withdrawn without penalty. (Also, worthy to note, with a TFSA you can make withdrawals, and if you withdraw enough to bring your balance below the lifetime maximum (or equivalent for your age, if you are younger), you regain that contribution room. You can’t do that with RRSPs.)
Using a TFSA as “a savings vehicle,” Kearns says, “you may make 1% interest. But you can put other investments in your TFSA.”
Here are several types of investments you can hold inside a TFSA. We’ll explain more on each below, including GICs, bonds, ETFs and mutual funds.
Rates current as of October 3, 2020.
How these GICs fit on into our best TFSA investments in Canada is based on the secured annual interest rate that you’ll earn.
GICs are kind of like bonds, in that you’re directly giving money to a big company—likely a bank, credit union, mortgage or insurance provider—with a determined interest rate return. You are giving them money so that they may loan money to their customers. You can buy them directly through the companies or through a third party, like an online brokerage. As mentioned with bonds above, GICs can fall victim to inflation, as the return on the GIC may not keep pace with the purchasing power of your original investment, meaning your money could lose value over time.
These are considered pretty safe investments, says Kearns, especially with the predetermined maturity date and insurance rate. But banks et al. aren’t immune to desperate times—like, oh, you know, pandemics and recessions. However the Canadian Deposit Insurance Corporation, “protects eligible deposits at each of our member financial institutions to a maximum of $100,000.” And that includes GICs.
Also, with GICs from insurance companies, you can get additional benefits, including the ability to list a beneficiary, annual payouts and more.
Select “TFSA” in the comparison tool below to find some of the best and up-to-date TFSA GIC rates from Ratehub’s partners.
The best TFSA investments in Canada include bonds because they pay interest income to investors and are taxed at the highest rate, so a TFSA can be an efficient way to avoid increasing taxable income and paying more tax, says Kearns.
A bond is basically a loan you give to a company or level of government. According to the Government of Canada, “A bond is a certificate you receive for a loan you make to a company or government (an issuer). In return, the issuer of the bond promises to pay you interest at a set rate and to repay the loan on a set date.”
There are two times you can buy a bond: One, when the bonds are initially issued to sell; and, two, as a resale. So, you may be able to directly buy the bond, but when it comes to resale, you’ll buy it from a broker, and it will be traded and sold for the best rates by a portfolio manager. Fees are worked into the price of the bond. At maturity, you are paid back the initial value of the bond, plus interest.
Bonds are considered safe, because you don’t lose your initial investment in the bond when it matures. The reason you’re safe with bonds, says Kearns, “is that these companies [and governments] who borrow with bonds must have the cash flow to be able to pay the secured interest back to the investor.” Even if a company goes bankrupt, the bond lenders are among the first to be paid legally. And, this year, a record number of bonds are available for Canadians, reports The Globe and Mail.
Essentially, what you see is what you get. However, buying and selling bonds is dependent on the market. The prices can depend on the appetite for the bond. It’s considered a conservative investment. One risk may be with longer terms, where the bond loses its value based on inflation.
We added ETFs to our list of best TFSA investments in Canada, because these ETFs are a low-cost and simplified way to invest in a variety of investments for your TFSA. And they can be found in “D-I-Y portfolios on self-directed investment platforms and also as part of managed portfolios run by providers, like Questrade* and Wealthsimple*,” says Kearns.
ETFs are more of a cocktail, compared to a single-company bond or stock. When you invest in ETFs, you’re investing your money into a selected group of companies. ETFs are traded and sold on exchanges, very much like stocks, because they hold stocks, commodities and/or bonds. Most ETFs are “passively managed,” meaning that the buying and selling of the underlying investments are based on overall market, economic and industry trends. You can opt for “actively managed” ETFs, where the fund managers buy and sell the investments in an effort to beat the market for better gains. That’s a risk, though, as they are not always successful, which may cost you. ETFs are also often compared to mutual funds for their lower costs (more on that below).
ETFs are generally managed based on the type of industry or commodity, to buy and sell what is in the ETFs, so that you don’t have to and so that your interest returns are (hopefully) in line with your expectations. That can result in lower fees for you. Brokerage fees are added on to the cost of the ETFs, which work out to about $10 or less per $1,000 invested, reports The Globe & Mail, compared stock brokerage fees, which can double or quadruple that. However, there’s no guarantee with ETFs; their value can fluctuate with the market, as they are bought and sold on market exchanges, such as the Toronto Stock Exchange.
When you buy ETFs, from financial brokers, independent advisors and online firms Kearns mentioned above, like Wealthsimple and Questrade, you will be asked a few questions to determine your aversion to risk. So, be honest, about your expectations so that you can be best matched with ETFs that you’ll be happy with.
Compare the best robo-advisors in Canada
In Canada there are literally thousands of mutual funds to choose from, says Kearns. So you have options based on how interested you are in monitoring the mutual funds and your aversion to risk.
As noted above, ETFs are often compared to mutual funds, especially for those shopping for the best TFSA investments in Canada. Mutual funds have been around for longer than ETFs, but work very much in the same way, offering a basket of several different investments. The difference lies in how you buy them. Mutual funds are valued at a set price at the end of the trading day, where ETF prices can fluctuate at any hour, depending on the stock market, says Kearns. You can buy mutual funds for your TFSA from a broker, but you can also acquire them from banks, credit unions, independent advisors and so on. Often it involves setting up an account online, doing a quiz about your risk tolerance, and specifying how much money you want to contribute.
Mutual funds, as noted with ETFs, are much more volatile than bonds or GICs. But most are actively monitored by a fund manager. So, these are the most expensive of this bunch of TFSA investments because of its high-maintenance nature. The mutual fund fees, covering administrative and operating costs, are referred to as Management Expense Ratio (MER). Depending on the types of mutual funds you invest in (series A to F), the MERs can vary. Generally speaking, the MER is around 2%, which covers the financial advisor’s services and advice. “This is reasonable if the client is receiving personalized advice and has a customized financial plan in place,” adds Kearns. “There are funds at 2.5% and higher. Unless the fund has relative exceptional historical returns, then the fee is likely too high. At 2% or less would be ideal for total fees being paid by the client.”
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In your article there is no mention of holding precious metals in a TFSA. My question is if you currently hold precious metal bullion outside of your TFSA, is it necessary to sell the precious metal deposit the proceeds of the sale , then re-purchase the bullion?
Response from the MoneySense editorial team:
Hi Terry, thanks for the question.
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
And the big one left off the table???
EQUITIES (Stocks)
Potential for larger gains (or loss) than all the others. Learning to invest should include some equities. YES, you will more than most likely lose some. If you use it to learn then more than most likely you will be ahead of the game
RICARDO
Your advice is very useful, however, another investment that is missing are blue chip stock and high dividend stocks, R.O.E. In bank stocks has been quite decent (RBC, National Bank, BMO, etc.) and in addition to their dividends are a very safe investment and less volatile than EFT,s and no management fees attached to them. Therefore the dividend return is net to you and not diluted by management fees.
@Terry Fisk – Short answer is no. The government does not allow people to transfer investments into their TFSAs. You would have to sell your precious metal investments, realizing any capital gains, and take those proceeds and re-purchase the metals within your TFSA, assuming you have contribution room remaining.
Note: I tried to use the ‘Reply’ button to respond to your comment but it did not work.
Quote from this article…
(Also, worthy to note, with a TFSA you can make withdrawals, and if you withdraw enough to bring your balance below the lifetime maximum (or equivalent for your age, if you are younger), you regain that contribution room.
Is this accurate? I was under the impression that any money you withdraw this year can be put back in during the next calendar year. So, if you had grown your TFSA to say $75,000 and you need the money for the short term, you can replace the full $75,000 in the next calendar year. Am I incorrect with my assumption?
Hi John,
In your example, you would regain the $75,000 in contribution room, but you can only put the annual maximum in each year, regardless of your total contribution room. For the year 2020, the TFSA contribution limit is $6,000.
Hey John,
I think your initial assumption about a $75,000 withdrawal and re-contribution is correct – the following calendar year you would be able to re-contribute the entire amount, plus the additional contribution room you gain from the calendar year rolling forward. In this case that would be 75K + an extra ~6K (from the year rolling into 2021).
The annual contribution max for each year is only for “new” contributions made to the account and assuming no withdrawals have been made.
Details are all listed on the CRA website for TFSAs:
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4466/tax-free-savings-account-tfsa-guide-individuals.html#contributions
“Many will deposit up to $6,000 per year (or up to $65,900 cumulative contribution, if they’re catching up from previous years)”
I believe the cumulative limit (including 2020) is $69,500.
Thanks for letting us know. We will update this as soon as we can. Our goal is to have the most up-to-date information. We do our best to fact check all our content before it gets published and make updates regularly, but some things may get missed. We would like to remind our readers to do their own fact checking before making any personal finance decisions.
What is the best option for investment accounts for kids under age 18? Individual TFSA being maxed out and RESP being maxed. What other accounts are available on behalf of kids?
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
I know Im supposed to have a split between equities and bonds/GICs/etc but… I look at the chart above and I get $466 for a 5 year, $5000 investment in a GIC? Best case scenario?
I can put that in CIBC stock, for example, and get almost that much a year in Dividends plus any growth. I know there’s more risk but… its pretty minimal, really.
I just struggle with how that makes sense.
We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
Assume I have money in a regular TFSA where the room is all used up; now I want to open a mutual fund TFSA.
I know I could transfer that money over without it counting as a TFSA deposit; But, what if I wanted to buy more of the fund.
Could I buy more of the fund using regular taxable income? So in case the fund grows it will increase the overall TFSA room?
Or would I need to have two funds of the exact same type, one for TFSA deposits and one for regular deposits
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.