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How to Invest in TFSA in Canada?

There are several financial instruments through which an individual can invest their money and secure their financial future. It is important to invest money at an early age because that will yield you the benefit of compounding. One such instrument to save your funds is TFSA also known as Tax-Free Savings Account. But what is TFSA and how can you invest in TFSA in Canada? Let’s find out in this article. 

Tax-Free Savings Accounts (TSFA) started in the year 2009, and since then, Canadians seem to have welcomed it with open hands. What’s more amazing is that more than 69% of the Canadian families have invested in TFSA in the tax year of 2018, in my opinion, that’s a huge number of households.

Read: 10 Vital Financial Must-Haves for Newcomers to Canada 

What Actually is TFSA?

TFSA is basically an account where one can invest their savings or funds; along with that, one can also secure their investment returns as this is an account in which contributions, capital gains, dividends, and interests earned are tax-free.

A contribution limit is announced by the government each year (6000$ for 2021), also if the contribution room remains unused then it can be extended indefinitely. TFSA is a resourceful investment instrument; it is structured in a way that it can satisfy diverse goals. These goals may include emergency funds, down payment for a home, debt repayment, retirement savings, etc.

The real question that arises is how to invest in TFSA? And which assets you can invest in TFSA? 

Read: 100 Innovative Ways To Save Money On A Tight Budget

How to Invest in TFSA in Canada?

There are a lot of alternatives that you can use to invest in a Tax-Free Savings Account. I have listed a few options below. 

Cash is a Good Option

To understand how to invest in TFSA in Canada, this option would come up as a very easy one. One of the most simple and conventional choices is investing through cash. You can choose to invest your dollars in TFSA instead of letting them sit idle.

Just like the different savings accounts available to you, TFSA is also a saving account in which you can invest your cash and earn interest. There are savings accounts that provide “high-interest” rates and are specifically made for TFSA. Refer to the options below. 

  • TFSA at Tangerine Bank: Provides 0.10% rate
  • High-Interest TFSA at TD: Provides 0.05% rate
  • TFSA Tax Advantage Savings Account at CIBC: Provides 0.05% rate
  • TFSA at Simplii Financial: Provides 0.10% rate
  • EQ Bank TFSA: You can receive an ideal rate of 1.25% for your TFSA account. EQ Bank also provides TFSA GIC (Tax-Free Saving Accounts Guaranteed Income Certificate).

Short-investment outlook, minimal risk allowance, etc. could be some of the reasons behind investing money in a TFSA account with high interest. Cash is one option to invest in savings accounts that allow you to save money for the future. 

Read: How Much Money Do You Need To Retire In Canada?

Index Funds or Exchange Traded Funds (ETFs)

Exchange-Traded Funds (ETFs) are similar to stocks; they can be traded on a stock exchange and their prices fluctuate. Their prices are also economical as compared to the mutual/index funds.

For a TFSA account that is only for an individual, ETFs can be considered a great option for investment. Also, keep an eye on the price you have to incur while the exchange of an ETF using your payment account.

Wealthsimple Trade proposes zero-commission stock which also allows you to buy or sell ETFs in Canada. Questrade also provides some perks when you sign-up. For trading using Questrade, you require at least a $1000 balance.

Did you know that the market share of ETFs is expanding in Canada at a great pace and it is expected that by 2023, the assets under management or AUM is likely to shoot up to $400 billion?

The drawback that comes into the picture is that at least once in a year you need to analyze and shuffle your portfolio, which a few investors seem to find burdensome. You can also use the facilities provided by Robo-advisor as an alternate option for investing your funds in an ETF from your personal payment account. 

Mutual funds and Index funds are quite similar to one another, they are like a bunch of bonds, commodities, stocks, etc. However, there do exist dissimilarities between the two. Index funds are quite affordable as compared to conventional mutual funds. The reason behind index funds being more economical is that they are passively managed which results in low operational costs.

Go for a GIC (Guaranteed Income Certificate)

You need to know this option if you are looking for how to invest in TFSA in Canada. The people who desire risk-free to minimal risk investments in TFSA can consider the option of Guaranteed Income Certificates (GICs). GICs can also be termed Term Deposits.

A GIC returns you a secure rate of interest on the capital that you have invested and along with that your capital investment is also 100% secure. There are several kinds of GICs that you can choose from. Each GIC has a different rate of interest than the other one.

You can secure your funds for a specified period; this period can particularly range from one or two months to a number of years. You can easily acquire GIC related details from financial institutions such as credit unions, banks, etc.

Read: GIC vs. Mutual Funds – Which One is Best for You?

Mutual Funds

A collection of various investment options such as bonds, stocks, etc. is referred to as Mutual Funds. An investment company or a professional manager actively manages the mutual funds.

Even with minimal knowledge regarding investment, you can easily develop an assorted portfolio having mutual funds. Mutual funds prices include admin fees and MER.

There are various types of mutual funds available in the market. You can invest in mutual funds for TFSA by simply approaching your bank. Mutual funds are designed in such a manner that they are suitable to a wide range of investors having different risk tolerances and investment styles.

Independent Bonds and Stocks

For your TFSA account, you can engage in independent bonds and stocks. However, this method comes with a set of risks that you should be aware of before making any investment decision.

Purchasing independent bonds and stocks can turn out to be great when you want to diversify your portfolio. Do keep in mind that, if you are purchasing U.S. dividend-paying stocks as a part of your investment, you will have to pay 15% tax as withholding. However, such a capitation will not be a part of Canadian dividend funds. 

Read: How to Buy Stocks in Canada: The Ultimate Beginner’s Guide

Final Words

The primary reason why TSFAs are popular is that they are flexible. You can easily withdraw your funds from the account and you are also permitted to re-invest any amounts of the withdrawals made in the subsequent year.

Just like any other investment strategies, you should invest in a TFSA after a thorough evaluation regarding your financial goals, portfolio size, commissions to be paid, time period of investments, risk tolerance, and investment knowledge. It is about your hard-earned money, so, do your homework before making any decision. I hope this article answers your question on how to invest in TFSA in Canada. All the best for your investing journey! 

Read: Tax For Self-Employed In Canada: How Much To Set Aside For CPP & EI?


Devanshee Dave

Devanshee is a staff writer at YourFirst.ca. She is a finance enthusiast and has completed her Master’s degree in Mass Communication & Journalism. She is currently pursuing CFA (Chartered Financial Analyst) and has worked as a journalist in a local business newspaper, multiple start-ups as well as finance and economy-related online media houses.

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