The Best TFSA Investment Options and Strategies for 2022
The federal government created the Tax-Free Savings Account (TFSA) in 2009 as a way for Canadians to save tax-free for any purpose. Before the TFSA, Canadians were limited to saving in taxable accounts, except for RRSPs and RESPs.
The TFSAs flexibility has caused more and more Canadians to include their TFSA in their retirement planning. And that is the beauty of this account. It has the flexibility to meet the needs of almost any investor.
How Does a TFSA Work?
The TFSA is a tax-sheltered investment account available to Canadians 18 and older. There is an annual contribution limit, which for 2022 is $6,000. Each year, the limit is indexed to the Consumer Price Index (CPI) in increments of $500 to account for inflation.
With a TFSA, the unused contribution room is carried forward to future years. For example, as long as you were 18 in 2009, you would have a current lifetime contribution limit of $69,500 (the annual limit has been adjusted a few times over the years).
Unlike a Registered Retirement Savings Plan (RRSP), contributions to a TFSA are not tax-deductible; however, you won’t pay income tax when you withdraw money – a unique and popular feature of the TFSA. You cannot open a TFSA jointly, but married couples can each open an individual plan, effectively doubling their contribution room.
TFSA Investment Options
The name Tax-Free Savings Account is misleading because it suggests that you are investing the funds in an actual savings account. That’s not the case, however; if you limit your TFSA holdings to a savings account, you’ll miss out on many opportunities.
A TFSA is an investment account, and how you invest depends mainly on your investment objectives. You can keep TFSA money in a high-interest savings account as an emergency fund or save for a significant purchase.
But long-term investors may want to include their TFSA in their retirement planning to complement the funds in their pension or RRSP. The choice is up to you.
Best TFSA Investments
Let’s take a closer look at the qualified investments for your TFSA and the best place to go for each option.
- Invest with a Robo-Advisor
- Buy Individual Stocks or bonds
- Purchase Exchange-Traded Funds (ETFs)
- Invest in Mutual Funds
- High-Interest Savings TFSA
- Invest in a TFSA GIC
Invest Your TFSA with a Robo-Advisor
In recent years, thousands of Canadians have entrusted their investment portfolios to an automated financial planning service known as a Robo-advisor. A Robo-advisor offers investment portfolios using automated algorithms without the involvement of a human advisor.
Wealthsimple Invest is Canada’s largest Robo-advisor and our top choice here at MapleMoney. With Wealthsimple, you can open a TFSA account within minutes online and invest in a low-cost ETF portfolio that is automatically rebalanced.
You pay a 0.50% management fee on your portfolio (for balances up to $99,999), much lower than what you would pay for an actively managed mutual fund investment. A Robo-advisor is well suited for investors looking for low-cost investing that is 100% hands-off.
And Wealthsimple is far from the only Robo-advisor in Canada. Check out our list of the best Robo-advisors in Canada.
Hold Your TFSA Investments In Stocks
You can hold stocks, as well as government or corporate bonds inside your TFSA. Because the account is fully tax-sheltered, the potential tax savings are enormous. While stocks don’t always increase in value, you won’t pay tax on any capital gains or dividend income you receive.
The easiest and most affordable way to hold individual stocks in your TFSA account is through a self-directed TFSA aka discount brokerage. This is a self-directed account – as the investor, you are 100% responsible for the investment decisions, and for placing trades.
There are more than a dozen discount brokerages to choose from in Canada. I recommend Questrade as a well-rounded, low-cost online broker. With Questrade, you can purchase individual stocks for as little as $4.95 per trade, which is far lower than the big bank brokerages, which charge around $10 per trade. Another nice perk – Questrade does not charge an annual fee for a TFSA account.
Wealthsimple Trade is a suitable alternative for new investors who are okay with using a mobile trading platform. While it lacks the functionality of a Questrade or big bank broker, stock trades are free with Wealthsimple Trade.
Purchase ETFs In Your TFSA
If you’re searching for a low-cost TFSA investment that will match the returns of the market, ETFs might be your best bet. ETFs have become increasingly popular in recent years due to their incredibly low fees. Unlike an actively traded mutual fund, ETF managers aren’t trying to outperform the benchmark, they’re only trying to match it. This passive approach requires less oversight, resulting in lower fees.
With ETFs, you get diversification and market returns at a low cost. Some ETFs boast MERs lower than 0.10%. Another benefit is convenience; ETFs trade like stocks, so they can be bought and sold on any designated stock exchange throughout the day, and trades are settled instantly.
As with stocks, the best way to invest in ETFs is to open a TFSA account with your online broker of choice, like Questrade or Wealthsimple Trade. Both companies offer free ETF purchases, which is important, as trading fees can eat into your returns over time.
For more information, check out our list of the best Canadian ETFs.
Invest In a Mutual Funds TFSA
While I don’t recommend mutual funds due to the high management fees, know that you can buy them within a TFSA account. Mutual funds remain popular with Canadian investors and they do have some benefits.
They are easy to buy – you can walk into any financial institution in Canada and open a TFSA mutual fund account. They are professionally managed and rebalanced, making them largely a hands-off investment. You can also purchase them on your own inside a self-directed investing platform.
The big downside to most mutual funds is that they are very expensive. It’s not uncommon to pay 2% or more in fees for a Canadian Equity or Balanced mutual fund.
When compared to ETFs, which charge a fraction of one percent, that’s a lot of lost savings potential. Especially when you consider that most mutual funds fail to outperform the stock market returns that ETFs provide.
Best High-Interest Savings Accounts for Your TFSA
Regardless of the various investment options available to TFSA account holders, some will only want to use it as a savings account – a place for emergency money or to save up for their next vacation.
And that’s ok. After all, you don’t want to put all of your money at risk. Your TFSA savings account will be principal guaranteed; in most cases, Canada Deposit Insurance Corporation (CDIC) will protect your balance up to $100,000.
And while your savings account returns will never make you rich a few online banks are offering some decent interest on TFSA savings.
EQ Bank TFSA Savings Account
EQ Bank has one of the best offers for TFSA savings. At this time of writing, they are paying 2.50% interest on TFSA savings. There are no fees, no minimum balance requirements, and the account comes with unlimited transactions. With EQ, you can have confidence knowing that their savings rates will always be among the highest in Canada.
Tangerine TFSA Savings Account
Tangerine is one of Canada’s top online banks. They’re known for their attractive bonus offers for new clients. Right now, they are offering an introductory TFSA interest rate of 4.50% for the first 5 months when you open a chequing and TFSA high-interest savings account. While the standard interest rate is only 1.00%, it’s worth considering the bonus rate.
Meridian Credit Union
At the moment, Meridian Credit Union is paying 2.05% interest on their TFSA savings account. According to Meridian, you can open an account online within 5 minutes, provided you are a Canadian resident, have reached the age of majority, and have a valid email address. Check out Meridian or one of the many financial institutions in your area.
Invest in a TFSA GIC
There is a shared benefit to Guaranteed Investment Accounts (GICs) and savings accounts. Both offer a guarantee of your principal, making them an ideal safety investment. The downside is that the returns are minimal, often not even keeping up with inflation.
Suppose you are investing for the short term and you want the principal guarantee. In that case, GIC returns are often favourable to savings accounts, but they require you to lock in your money for a specified period. Most GICs require a minimum $500 investment.
Here are a few of the top 1-Year GIC rates currently available:
EQ Bank: 5.10%
Meridian Credit Union: 4.70%
Simplii Financial: 4.50%
Posted 1-Year GIC Rates, as of November 5, 2022
Can I Hold US Stocks in My TFSA?
The short answer is yes, you can. However, your TFSA account may not be the best place to invest in US-listed stocks. That’s because, unlike with an RRSP, the IRS charges a 15% withholding tax on US stock dividends inside a TFSA.
In this way, Tax-Free Savings Accounts don’t get the same treatment as an RRSP. You may have to pay taxes on US stocks held in a TFSA. For this reason, you may want to stick with your RRSP for any US investing or at the very least, consult with a tax professional before buying US stocks in your TFSA.
TFSAs and Retirement Planning
Nowadays, many Canadians include their TFSA accounts in their retirement planning, alongside their workplace pensions and RRSPs. While there are several ways to do this, I’ll cover two main benefits.
For starters, unlike RRSPs and RRIFs, withdrawals from a TFSA are not taxed, so it’s much easier to predict how much income you’ll be able to withdraw in retirement, which is one less thing to worry about. Also, for Canadians who may have maxed out their RRSP contributions, the TFSA provides an additional tax shelter during their earning years.
Which Is the Best TFSA Investment for Me?
With so many options, you may be wondering how to make the best use of your Tax-Free Savings Account. To unlock its full potential, I recommend using your TFSA for long-term, market investments.
Not having to pay tax on investments with the highest potential returns over the long term unleashes the income potential of your investment. For that reason, if you can maximize your annual TFSA contributions, make it part of your long-term strategy, and find a regular savings account to stash your emergency fund.
If you’re not maximizing your TFSA contribution room or saving for the long term in your TFSA, then it’s a perfectly suitable place for short-term savings as well, especially with savings rates as high as they are right now.