Best TFSA Investments in Canada

Last Updated on

TFSA investmentThe tax-free savings account (TFSA) has been around for 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:

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 if you bank with Tangerine, 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. Our favourite discount brokerage is Questrade, where you can purchase commission-free exchange-traded funds (ETFs) to build your own portfolio. For all the details of why it’s our top pick, read our full Questrade review.

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

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:

  • Cash (savings and GICs)
  • Mutual funds
  • Government and corporate bonds
  • Exchange-traded Funds (ETFs)
  • Stocks

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 mutual fund, or 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.

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 (our top pick) or Questwealth Portfolios 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. You can take advantage of our promotion and get $10,000 managed for free for a year when you start investing with Wealthsimple. For more details on our recommended robo advisors, read our recommended Robo Advisors Guide.

  • Invest in ETFs through 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. Read more in our Ultimate Guide to Canada’s Discount Brokerages.

  • Tangerine mutual funds: Tangerine offers a suite of five mutual funds ranging from conservative to aggressive. Each fund comes with a MER of 1.07 percent. Each fund will automatically rebalance so there’s no concern over managing your own portfolio – just set it and forget it.

  • TD e-Series funds: TD’s popular e-Series funds can be purchased in a regular TFSA account with TD, or through a self-directed TFSA account at TD Direct Investing. The funds come in a variety of flavours, but most investors should stick with a portfolio consisting of Canadian equities, U.S. equities, International equities, and Canadian Bonds. A portfolio of those four funds can be built with a MER of around 0.42 percent. Investors are on their own to purchase funds and rebalance their portfolio.

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 (XBAL, XGRO), 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 – if you were 18 when the TFSA was introduced in 2009 then you’ll have $63,500 in available contribution room. 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 2 to 3 percent 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 Tangerine, which offers interest rates that are hard to beat and absolutely no fees. The high-interest savings account is currently paying 1.10%. What's even better is that new customers earn an impressive 2.75% interest for 6 months. Read our full Tangerine review to find out what we love about this online bank.

Start saving with Tangerine.


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.

If you’re looking for a bank offering GICs at a high-interest rate, Tangerine is an excellent option: their rates are currently 2.35% for an 18-month TFSA GIC. These rates are highly competitive compared to other online banks.

Start saving with Tangerine.


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 a high-interest savings account with a trustworthy online bank like Tangerine.

If your goals are further out – say five years or more – then you can think about investing in mutual 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 mutual funds or with a robo-advisor like Wealthsimple because there are no commissions when you buy and sell.

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.

Disclaimer: Young & Thrifty has entered into a referral and advertising arrangement with Wealthsimple US, LTD and receives compensation when you open an account or for certain qualifying activity which may include clicking links. You will not be charged a fee for this referral and Wealthsimple and Young and Thrifty are not related entities. It is a requirement to disclose that we earn these fees and also provide you with the latest Wealthsimple ADV brochure so you can learn more about them before opening an account.

The following two tabs change content below.
Robb Engen
Robb Engen is a leading personal finance expert in Canada and the co-founder of Boomer & Echo, an award-winning personal finance blog. He writes a monthly column in the Toronto Star’s Smart Money section and is a fee-only advisor who helps Canadians at different ages and stages get their finances on track and prepare for retirement. He's also regularly quoted or featured in top financial media, such as the Globe & Mail, MoneySense, the Financial Post, CBC, and Global News. Robb lives in Lethbridge, Alberta and is the married father of two young girls who keep him very busy.
Robb Engen

Latest posts by Robb Engen (see all)

Leave a Comment





> >