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youngandthrifty shares the options students have to invest in for a TFSA. These include high interest savings accounts, GIC's, mutual funds, and trading accounts

Since I’m going back to school in September, I have started to reminisce about the good ol’ times of my undergraduate degree, when I had absolutely nothing to worry about except to get good grades, work at my care-free retail part-time job, and party on the weekends to try and score free drinks from boys.  I had a pretty balanced student lifestyle, I was active in the school clubs and committees, I worked, I studied, got some scholarships, and I partied.  It was a pretty fulfilling undergrad.

I regret that I partied so much and wasted all that money I worked so hard to make.  But hey, you’re young only once, right?  However, there is something else I regret.

I wish I had started investing earlier.  I met a guy in college who was passionately involved with stock picking and trading (can you say HELLO what a turn on??) and his passion rubbed off on me.   He would do this instead of working a part-time job earning $9.50 an hour like I did, and he paid his way through university with his investments.  Inspired, I bought one or two stocks through my mom’s BMO Investorline brokerage, because at the time I didn’t have a brokerage account.  Thinking back, it was my first lesson in investing, don’t take hot stock tips from friends and acquaintances, especially if you don’t understand what you’re buying!  If they would have had a hands-off investing option back then like one of the new Canadian robo advisors,  I would have been all over that!

college life Pictures, Images and Photos

But I digress.  The old days of expensive brokerage accounts and commissions have vanished.  Things have changed, fast forward to 2011 and young Canadians these days are so lucky- they have the option of contributing to a TFSA.

In case you haven’t heard, a TFSA is a Tax Free Savings Account introduced by the government a few years back.   In a nutshell, you have to be 19 years and older to contribute to one and you can contribute $5000 per year of your after tax income.  You can withdraw the money any time but must wait until the next calender year to put that money back (only if it exceeds your combined contribution limit) or else you’ll be dinged with over-contribution charges.  If I were 19 now and a student, I would invest in a TFSA rather than an RRSP, that’s for sure.  I would also enjoy my beautiful youthful looks too HA!

As a student, you may think you’re at a disadvantage because you ARE a student and are relatively income-less, but you have time on your side.  Time my friend, is a very beautiful thing.

Here are the TFSA options:

TFSA as a Savings Account

Many (I think most) people are using their TFSA room for a high interest savings account or emergency fund of some sort.  This is a good idea, though in my opinion, $15,000 (which is the contribution room amount everyone has since the TFSA started) is quite a lot for an emergency fund!  These are savings accounts that give you back interest of 1.2% to 2% (at today’s current rates).  You might think this is a good idea because its tax free, but at 1.2 to 2% you’re not even beating out inflation, which is usually around 2-3%.

To be blatantly honest – using a TFSA as a savings account is NOT investing.  I guess it’s slightly better than putting money underneath your bed, but the rate of return on the interest is pretty negligible, especially if have small amounts in your TFSA.  You’re way better off opening a TFSA with robo advisor like Wealthsimple or a discount brokerage like Questrade.  If you’re absolutely set on using your TFSA as a simple savings account, I recommend using a Canadian online bank in order to make sure that you get the best interest rate available.  Places like Tangerine don’t have any storefront costs and consequently, they can pass those labour savings on to you as the final consumer.

TFSA as a GIC account

A GIC is a Guaranteed Income Certificate, whereby you put money in and it’s locked in.  The interest income is paid to you after you finish the term (it can be 1 year or two years or even five years).  It’s a safe bet as the original amount you contribute is protected, but usually the rates of returns are so nominal (like 1.5 to 2%) that they don’t beat inflation either.  It’s even worse than the High Interest Savings Accounts because you can’t access your money readily.

Mutual Fund TFSA

For a mutual fund based TFSA you can have pre-authorized monthly contributions and put powerful dollar cost averaging on your side.  This means that you neglect market timing (which takes the stress out of investing, though some people actually enjoy market timing and can get better returns if they employ value investing tactics).  My favourite is the TD E-series fund.  They are index funds with low Management Expense Ratios (they charge as low as 0.5% for some funds) really  help you keep more of your money.  ING Direct also has their own Streetwise funds.  It also has a low MER of 1%.  If you would rather have some help, there are many financial advisors, mutual fund advisors who can help you, though you have to be cognizant that some of the MER’s can be as high as 3.2%.  For example, Investors Group is one of them.

However, if you wish to access your money in a sooner rather than later, investing with your TFSA may not be for you, because that $10,000 you put in your TFSA might be very realistically be only $7500.  It’s hard to time the market and it really depends on your risk tolerance.

TFSA as a Trading Account

This is where I have my TFSA.  I have yet to transfer my non-registered investing account to my TFSA, though I plan to do this to max out my TFSA contribution room.  If they had this back when I was in school, I would probably pounce all over it.  I would probably only use a discount brokerage for the TFSA trading account, because if you went with a big bank brokerage account, you would be charged $25-$29 each time you make a trade.  That can really really eat away at the money you have invested in your TFSA.  I personally use Questrade.  It costs me $5 to make a trade – and I can even buy ETFs for free!  As a young investor, I would start with Exhange Traded Funds.  They also have low MER’s (slightly lower than the TD E-series) but you do have to pay a commission each time you trade.

The good thing about using the TFSA as a trading account is that you don’t have to pay tax on your capital gains.  However, you don’t get to use capital losses, either.  It’s almost like a virtual world trading world (like they have for “pretend” stock portfolios where you can see how well you invest) where you don’t have to worry about capital gains or losses for your tax return.  For that reason, I’m a big fan of the TFSA as a trading account because it’s sometimes difficult to be meticulous about your capital gains and losses, especially if you buy and sell stocks often.

HOWEVER, this is a big warning- if you think you might need this money in the near future, which is probably likely for young adults and students, investing your money can be very risky.  You never know where the market might be when you need the money.  You could have half of what you invested in the first place.  Or vice versa.  If you are willing to take that risk, then using your TFSA as an investment vehicle is for you.

Because the contribution room has been increasing (it’s now at $15,000) I think more and more people are probably thinking about switching or adding to their TFSA’s from a basic emergency fund.

Readers, of these four options, what do you have your TFSA in?

Article comments

Denese says:

I have been searching for a good way to invest my son’s money. He is only 14 and is now working in retail making approx. $200.00 every 2 weeks (after I give him spending money). He is clueless on how to save so I have been ‘charging him rent’ to secretly save for him. He blew his first $600.00 with nothing to show for it and is still skinny lol. I would really like to find something that will be medium term (if he want to buy a car in a few years) as well as long term (down payment on a house). Unfortunately because he is so young, nothing is set up that the money can be directly invested in his name(unless of course it is a basic savings account which gives you nothing really in interest. What do you think is the best option for someone of this age where mom still has all the say in how he manages his money.

Kyle says:

Hi Denese. Why not just a basic Canada Savings Bond that matures when he hits the age you wish him to get the money?

alex says:

I would have to argue that although working through school may not seem that interesting, but the work experience in itself is an investment.

Also, with costs of school today, students would need to trade up to nearly 100-200% their capital, unless they’d have over $100,000 in the bank somehow, then they could possibly get away with only needing to trade up to 10% their capital, but then who would need to do that if they’re a student with $100,000 sitting in the bank?

As a student myself, I know that it’s very dangerous locking up money for more than a few months, especially when one needs practically all of his income to live. I do know it’s not impossible to get extra money to invest, but likely in the area of 200-500/year, then again, that’s a few months of groceries 😛

Kyle says:

Hey Alex. I hear you on the groceries comment. Not sure I follow you on the 100-200% of capital thing, or the 10% capital deal. Care to explain why that is in reference to?

alex says:

Well I’m not completely sure about how trading works, but for someone to live off trading, he would probably need to make nearly $10,000/year to live off of.

So lets say a student would have $5000-10,000 in the bank, he would need a 100-200% return in order to have $10,000 to live off of & keep his existing funds to keep trading with.

But if such student had $100,000, he would only need a 10% return to make $10,000 in 1 year for his living expenses.

Like I said, not exactly sure how trading goes, but that’s how I calculated it.

Kyle says:

Oh I see what you mean Alex. I would never advocate trying to produce an income that way through trading. I was more referring to saving for long-term goals. Check out our free eBook for more on our attitude towards investing in general.

To clarify, I transfer the shares I hold directly into the TFSA – it’s a contribution in kind, but it does trigger a taxable event in my non registered account. No sale per se, ie no commissions etc.

young says:

@RossTaylorMoney- That’s a good idea- I think I might do that with my TFSA. I still have about $8000 contribution room and am wanting to move some of my stocks over. Idealistically, I thought I could save that much and put it in, but I think I need some short term liquid cash in case I need it going back to school.

Thanks for this great article – I featured it in my weekly round up in “the best of the rest” http://rosstaylor.org/ross/ask

young says:

@RossTaylorMoney- Thanks Ross, appreciate the mention!

A great article thanks. Each of the past three years I have made my TFSA contribution by transferring into my self directed TFSA stocks I hold in my trading account which have good upside potential, and are perhaps out of favour at the moment.

This way, I may generate a small loss fo tax purposes outside the TFSA, and any gains I make in the TFSA are tax exempt. It’s working out really well !

young says:

@RossTaylorMoney- That’s a good strategy- so basically you sell in your non-registered portfolio and then you put it in your TFSA?

Great post.

I, too, have been using my TFSA for an emergency fund in a regular savings account. Once I hit my target though, I’ll start diversifying the funds elsewehere. First in a GIC account to stabilize (and lower) my Line of Credit (should I ever need it) and then a trading account to grow my wealth.

young says:

@The Asian Pair- Sounds like a good plan, lady! It’s good to have some cash available for emergencies and unplanned “life” that’s for sure.

My biggest mistake as a student was buying RSPs. It was a bone-headed thing to do. My tax rebate wasn’t much because I had such a low income, and when I eventually took that money out, I paid higher taxes than the rebate saved me. I had to sell my RSPs when moving to Singapore, and it cost me 25% for every dollar I had in there. Bummer. It’s nice to hear that there are better options today.

young says:

@Andrew Hallam- I was almost going to do that as well as a student because I heard so many of my classmates/ acquaintances doing the same thing. I felt inadequate because everyone I knew had RRSP’s. I’m glad too that there are other options today. Sorry to hear it cost you 25%, but I’m sure your portfolio is MUCH bigger now (They don’t call you the Millionaire Teacher for nothing!), and the RRSPs you had as a student probably weren’t that much?

“Youth is wasted on the young” eh Y & T?

Great post. I would actually recommend investing it inside your parent’s TFSA if there is room, and then transferring it over at a later date. This way it doesn’t have to show up on student loan applications.

young says:

@TM- Ahh good point and excellent tip, Teacher Man! Its been so long since I’ve been out of school that I forgot about those crazy student loans. 😉

I didn’t have $500 let alone $5,000 when I was 19. Great synopses though. If I had money I would go with the trading account option as well.

young says:

@retirebyforty- I had $500 but blew it all the time on clothes, food, clubbing. Oh well, c’est la vie!

Jewel of Toronto says:

You’ve inspired me. I just transferred my “high-interest” TSFA to a mutal fund. Thanks!

young says:

@Jewel of Toronto- Oh wow! That’s great to hear- can’t believe I’m of influence! You’ve made my day. 🙂 Good luck with the returns on your funds!

Echo says:

I think Questrade is a good option for young people, and with the low contribution minimum and low trade fees it’s a great fit for the TFSA. I agree that the high interest savings account is not an effective use of this account.

young says:

@echo- Yeah, as long as the said young people have patience for the trading platform (hehe). I think it was the wording that threw most people off from the TFSA- because it says “Savings account” one automatically thinks its just a savings account. Just like how people say “Oh I bought RRSPS already” (when they mean they invested in RRSPS but don’t really know if it’s a GIC in the RRSP, a mutual fund in the RRSP, self directed stocks in the RRSP etc. etc.)