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Many Canadians still misunderstand what makes the TFSA such a fantastic savings tool. It should be called the tax free investing account! Here’s what makes a great TFSA investment.

The tax-free savings account (TFSA) has been around for over a decade now, but many Canadians still underutilize or misunderstand what makes the TFSA such a fantastic savings tool.

The problem lies in the name: tax-free savings account. We should have called it a tax-free investment account! Indeed, one of the best ways to utilize your TFSA is to invest for the long-term. What makes a great TFSA investment? Let’s take a look.

What are the Best TFSA Investments?

The TFSA is a powerful savings vehicle, and depending on your income, can and should be used as your primary retirement savings account or as a complement to your RRSP (ideally maxing out both).

Side note: Remember, the TFSA is a mirror image of the RRSP. While you don’t receive a tax deduction when you contribute to your TFSA, you also don’t pay any taxes when you withdraw from your TFSA. With an RRSP, you get the deduction upfront but pay taxes on your withdrawals. Assuming you have the same marginal tax rate when you contribute as you do when you withdraw, the end result is the same whether you use the TFSA or the RRSP.

With that out of the way, what’s the best way to invest in your TFSA? Here are some options:

A Robo Advisor

All of the robo advisors in Canada offer TFSA accounts and allow investors to build a portfolio of index funds and ETFs. A robo-advisor like Wealthsimple is a great way for investors to set up a sophisticated investment portfolio without the hassle of doing it on their own, or the cost of hiring a full-service advisor. Expect to pay around 0.50 percent in management fees, plus another 0.20 percent or so for the investments held in your account. For more details on our recommended robo advisors, read our recommended Robo Advisors Guide.

Get $100 when you open your first Wealthsimple Invest account!

A Discount Brokerage

Investors can open a self-directed TFSA account at their bank’s discount brokerage arm or at an independent online brokerage.  From there, you can build your own portfolio of ETFs by following the Canadian Couch Potato model portfolios or coming up with something on your own. With Questrade (our preferred broker) you will get $50 in free trades when you open a new account and start investing with Questrade.

Another great option is Wealthsimple Trade — Canada’s only zero-commission online brokerage. That means you can open a TFSA and trade stocks and ETFs without paying any fees. Plus, you can take advantage of our exclusive promo offer: open a new Wealthsimple Trade account, and get a $50 cash bonus + $0 commission trades. All you have to do is deposit and trade at least $250. Sign-up today to take advantage of this exclusive offer.

Read more in our Ultimate Guide to Canada’s Discount Brokerages.

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Regular TFSA vs. Self-Directed TFSA

Most of us are familiar with a regular TFSA, where all the big banks, both brick-and-mortar and online, typically promote their savings accounts, GICs, and mutual fund options (if available). The problem with a regular TFSA is that you’re limited to your bank’s proprietary options, so with some banks, you’ll only get to choose from their savings account, GICs, and mutual funds.

On the other hand, you can open a self-directed TFSA at any bank or online brokerage, and get access to a wide array of options, including mutual funds, individual stocks, and ETFs from all types of issuers.

The bottom line? With a self-directed TFSA, the sky is the limit in terms of the types of investments you can buy.

Get $50 in free trades when you start investing with Questrade!

What are Qualified TFSA Investments?

There are so many ways to save and invest your money inside a TFSA. The best part is that every cent of interest, dividend, or capital gain received inside your TFSA is tax-free while it’s inside your account, and tax-free when you take it out. What’s not to love about that?!? Here are some qualified TFSA investments:

A qualified TFSA investment starts with cash: short-term, basic savings like a high-interest savings account – ideal for emergency funds or short-term liquid savings. You can also purchase a GIC, which locks your money away for anywhere from 90 days to five years. Because the money is “locked-in”, you should get a better interest rate than you would find in a high-interest savings account, but rates do fluctuate so you’ll have to do your research.

Moving on up the ladder, you can invest in mutual funds inside your TFSA. We’re not big fans of the big bank mutual funds that come with high management expense ratios (MERs). Instead, what you’ll want to look for is a portfolio of funds that charge 1 percent or less. Mutual funds can be beneficial especially for those investors who contribute regularly and don’t want to pay trading commissions.

You can also invest in individual government or corporate bonds in your TFSA, although most people now get their fixed income or bond exposure through a mutual fund or ETF.

ETFs and individual stocks are also considered qualified TFSA investments, as long as they are listed on a designated stock exchange. Stocks sold “over the counter” (i.e. not on a central exchange) do not qualify as a TFSA investment.

How to Invest TFSA in Stocks

While not typically recommended on this site, you can purchase and invest in stocks inside your TFSA – just like you can inside an RRSP or non-registered account. In fact, when the TFSA was first introduced in 2009, I invested in blue-chip Canadian dividend-paying stocks (think: banks, telecommunications, pipelines, etc.) before switching to index ETFs several years later.

Follow the same steps as investing in ETFs: open up a self-directed TFSA at a discount brokerage account and fund the account with a lump sum or regular contributions. From there you can trade stocks by clicking “buy”, entering the ticker symbol of the stock you wish to purchase, along with the number of shares you want to buy, and executing the trade.

Finding the Best ETF for TFSA

Investors using ETFs in their RRSP can reduce or avoid foreign withholding taxes by choosing U.S.-listed ETFs and executing a move known as Norbert’s Gambit.

Inside a TFSA, these taxes are unavoidable, so it’s best to just simplify your holdings and control what you can for costs such as MER and trading commissions.

That’s why the new asset allocation ETFs or one-ticket balanced ETFs offered by Vanguard (VCNS, VBAL, VGRO, VEQT), iShares (XCNS, XBAL, XGRO, XEQT), and BMO (ZCON, ZBAL, ZGRO) are worth a look.

With just one ETF, you can get a low-cost, globally diversified portfolio of equities and fixed income. For those who contribute the full annual amount to their TFSA each year, you’d only need to make a single trade at the beginning of the year – limiting your trading commissions.

These ETFs, which you can find in our best ETFs in Canada guide, come with MERs in the 0.20% to 0.25% range. Expect non-recoverable foreign withholding taxes to add another 0.15% to that total, giving you a relatively inexpensive investment portfolio inside your TFSA.

Holding Bonds in Your TFSA

Interest from bond funds and bond ETFs are taxed at your marginal tax rate, just like employment income. However, in a tax-free savings account, all growth is tax-free and no tax is paid when the funds are withdrawn.

Sounds like the TFSA is a perfect place for bonds then, right? Not necessarily. The answer depends on your overall asset allocation spread across all of your investment accounts (RRSP, TFSA, non-registered). Generally speaking, it’s best to put your fixed income such as bonds in a tax-sheltered account to avoid or defer paying taxes on interest income. So that could mean bonds are best suited inside your RRSP or your TFSA.

There’s no right or wrong answer.

What Are Considered Safe Investments?

While I like to think long-term investing is the preferred strategy for your TFSA, some people just aren’t wired that way and would rather keep their money safe. Furthermore, if your savings goals are for the short-or-medium term, such as building an emergency fund or saving for a down payment to buy a house or car, then a safe investment is exactly what you need.

Opening a regular TFSA at a big bank or online bank can be beneficial over a regular daily savings account. Your savings could be substantial – As of 2021, $75,500 total for those who were 18 in 2009. If that amount sits in your daily savings account, you’ll owe a couple of hundred dollars in taxes each year. Meanwhile, it can grow tax-free in your TFSA and likely earn a better interest rate.

Indeed, you’ll likely find rates in the 1.5% to the 2.5% range for high-interest TFSAs and GICs. Many banks offer short term promotional offers to entice new customers, so do your research and find the best rates online.

Holding a HISA (High-Interest Savings Account) in Your TFSA

Ideal for short-term savers, you can stash your cash inside a high-interest savings account and the interest will grow tax-free within your TFSA. One pitfall to avoid is raiding your TFSA cash stash too often, as you’ll quickly lose track of your available contribution room. Do your research and read our article on the best high-interest savings accounts in Canada.

A winner is Savings Plus Account, which offers some of the best interest rates in Canada and absolutely no fees and no minimum balance. The TFSA high-interest savings account is currently payingThis means that Canadians who were at least 18 years of age in 2009 would have up to $75,500 in total cumulative TFSA contribution room as of Jan. 1, 2021., much higher than the big banks and even higher than most other online-only banks. Read our full EQ Bank review to find out what we like about this online bank

Start saving with EQ Bank

*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.

Holding GICs in a TFSA

A better option for a fixed term savings goal (such as buying a new house in three years), a guaranteed investment certificate (GIC) allows you to earn some interest while protecting your principal. Again, any interest earned is not subject to taxes while inside your TFSA or when you withdraw the funds. Just do your research and find the best GIC rates in Canada before plunking down your money.

What is the Best TFSA Investment Option?

The best TFSA investment option is the one best suited to your financial goals. For conservative savers, or those looking to set aside cash for a short-term money goal, the best investment is high-interest savings account with a trustworthy online bank.

If your goals are further out – say five years or more – then you can think about investing in index funds or ETFs. Again, the best investment for your TFSA will depend on your individual situation. Do you contribute to your TFSA in small, more frequent amounts? You might be better suited for a portfolio of index funds or with a robo-advisor like Wealthsimple because there are no commissions when you buy and sell. Plus, you can take advantage of our exclusive promo offer: open and fund your first Wealthsimple Invest account (min. $1,000 initial deposit), and get a $100 cash bonus deposited into your account.

An investor with a larger TFSA who contributes maybe once or a few times a year might find ETFs more compelling due to the lower MER and ability to self-direct their portfolio.

Your mileage may vary.

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Article comments

Karim says:

Hi, I just red JL Collins book simple path to wealth. I’m a 30 years old canadian investing in canadian money. He’s all about VTSAX has the only stock you need to buy. VTSAX is not good because of the CAD v.s USD devise. I’m about to get all in for few years with XEQT in my TFSA and then switch it in my RSP to ”lower my income braket” and get more of canadian family allocation from the government. Do you think it’s a good strategy and more importantly, do you think that XEQT can be compare has the VTSAX to follow the principle of jl collins ?

Robb Engen says:

Hi Karim, sounds like you’re off to a great start! As you noted, there are some differences between the types of investments we have access to in Canada versus what’s available in the U.S.

VTSAX holds the entire U.S. stock market, and it has performed very well over the past decade. But I’d argue that there’s room for more global diversification outside of the U.S. The guiding principle, though, is to keep thing simple, low cost, and just buy one diversified fund. You’ve already got that figured out by buying XEQT. It’s a great all-in-one ETF to hold in both your TFSA and your RRSP as long as you can handle the volatility of a 100% stock portfolio.

P says:

Hi Robb, thanks for writing this article. I’m new to investing and am trying to decide on a strategy. I was wondering why you decided to switch to ETFs after initially investing in blue-chip stocks? Are you solely ETFs or do you adopt a hybrid approach? Thank you for your advice!

Robb Engen says:

@P – My pleasure! Honestly, I built a portfolio of dividend paying stocks back in 2009 before ETFs really took off and became the go-to product for building an investment portfolio. I liked the concept of buying stocks with a long history of paying dividends.

But I did more research on passive investing and realized I was massively under-diversified by owning 20 Canadian dividend stocks. At the same time the ETF landscape was evolving and it was becoming easier for self-directed investors to build a globally diversified portfolio with just 1-4 ETFs.

I had a couple of bad stock picks that got hammered when energy prices fell in 2015 and I decided to stop trying to guess which individual stocks would outperform and instead just buy all of the stocks with a set of index funds.

I started with a two-ETF solution – VCN (Canada), and VXC (all World, except for Canada). Then, when Vanguard launched its all-in-one asset allocation ETFs like VBAL, VGRO, and VEQT, I moved my portfolio to VEQT.

In my view, simple beats complex, so I’m thrilled with my one-fund solution.

In the book Millionaire Teacher, author Andrew Hallam used to recommend investors set aside 5-10% of their portfolio to individual stocks to scratch their stock-picking itch. But in the second edition of the book he removed that section, saying investors who did this “core-and-explore” approach tended to make big mistakes with their individual stock investments and spend too much time chasing big returns. Instead, he now recommends a 100% passive investing portfolio with index funds or ETFs. I agree with that approach.

Nosheen says:

Hello, I wanted to ask your advice. My son will turn 18 next year and I want him to start TFSA for long term saving. Should he go for a bank that has investment options predefined based on risk comfort level or try to build his own portfolio. Which would be the best bank/company to use for this?

Robb Engen says:

Hi Nosheen, first I’ll assume that your son does not need this money for any short-term needs (post-secondary, a car, etc).

A TFSA is a great option for long-term investing and I’d recommend getting started with a robo advisor like Wealthsimple. Opening a discount brokerage account and trying to invest on his own might lead to some mistakes (chasing hot stocks, trading too often, etc). Best to stick with a broadly diversified portfolio of index funds to build a long-term strong habit of investing and staying out of the way.