In recent years, the Tax-Free Savings Account (TFSA) has gained immense popularity among Canadians. A recent poll revealed that more Canadians now possess a TFSA (57%) compared to a Registered Retirement Savings Plan (RRSP) (52%). TFSAs are prized for their versatility, allowing Canadians to save or invest for a multitude of purposes, not limited to just retirement. The flexibility of making withdrawals at any time adds to their appeal.
However, this ease of use and withdrawal comes with a challenge, as a significant portion of TFSA funds is parked in low-yield savings accounts (42%). One could attribute this to the account’s name, which implies its primary purpose is for “saving” money.
What types of investments can you hold in a TFSA account? In essence, most investment assets permitted in an RRSP are also acceptable in a TFSA.
Here, we’ll explore some of the best investment options for your Tax-Free Savings Account in 2023.
The Canadian government permits investments in various categories, including:
Your choice of investment within your TFSA should be determined by factors like:
The most popular assets for TFSA accounts include savings accounts and Guaranteed Investment Certificates (GICs).
Savings accounts are a wise choice if you anticipate needing your funds within a year or so. The interest income remains 100% tax-free. However, it’s essential to find a high-interest savings account offering returns above the inflation rate. EQ Bank is a standout choice, providing one of the best TFSA interest rates in Canada.
For more options, consult a list of the best TFSA savings accounts in Canada.
Guaranteed Investment Certificates (GICs) are ideal for short to medium-term (1-5 years) savings in a low-risk asset. GICs can be laddered to provide income at specific times, typically offering higher rates compared to savings accounts of the same duration. Your principal is guaranteed, mitigating the risk of losing your investment.
Self-directed TFSA investing can be cost-effective with lower management fees and potentially higher returns if you possess investment expertise. With a self-directed TFSA, you have control over your asset allocation and investment choices.
Utilizing a discount brokerage account, you can easily trade stocks, ETFs, mutual funds, and other assets from the comfort of your home.
However, managing your own portfolio requires a good understanding of asset allocation, risk-return dynamics, and portfolio rebalancing. Be mindful of trading fees and commissions, which can accumulate if you trade frequently.
Exchange-Traded Funds (ETFs) are a cost-efficient alternative to mutual funds. They offer diversification since a single ETF may hold thousands of stocks or bonds. ETFs can mirror the performance of an entire index, market, or industry sector, often at a fraction of the cost of mutual funds.
Popular ETF providers like Vanguard, iShares, and BMO offer cost-effective options. Vanguard’s All-in-One ETF Portfolios simplify investing further, eliminating the need for manual rebalancing.
Investing in individual stocks through a discount brokerage is straightforward. Some brokerages, like Wealthsimple Trade, even offer commission-free stock trading within TFSA accounts.
However, investing in stocks carries inherent risks, and returns are not guaranteed. Diversification is key; consider diversified equity ETFs to reduce risk. Keep in mind that capital losses within a TFSA cannot offset capital gains.
Mutual funds have traditionally been a popular investment option. However, they often come with high management fees, eroding potential returns. Index funds, like TD e-Series Funds or Tangerine Investment Funds, offer passively managed, cost-effective alternatives.
Robo-advisors are gaining prominence as they offer professionally managed portfolios with lower fees than traditional wealth management services. They determine your risk tolerance and investment objectives, creating a portfolio that matches your needs. Robo-advisors also handle portfolio rebalancing.
Quest wealth is known for its low fees, while Wealth simple Invest is Canada’s most popular robo-advisor.
The primary advantages of a TFSA include:
Some limitations of TFSAs include:
In summary, your choice of TFSA investments depends on your financial goals, risk tolerance, and investment knowledge. For short-term needs, consider high-interest savings accounts or GICs. Robo-advisors and self-directed accounts offer diversified investment options, including ETFs, stocks, and low-cost index funds. Evaluate the pros and cons of each option to build a TFSA portfolio that aligns with your financial objectives.
