If you’re using your tax-free savings account solely to deposit cash over the long term, Certified Financial Planner Trevor Kearns says you’re not using the TFSA to its full potential.
You have more options (and better potential gains) than that. Kearns tells many of his clients to mentally drop the “A” in TFSA and to think of it as more of a “portfolio” than an “account.” Many will deposit up to $6,000 per year (or up to $65,900 cumulative contribution, if they’re catching up from previous years), into a registered savings account to benefit from fact their money will earn interest tax-free, and can be withdrawn without penalty. (Also, worthy to note, with a TFSA you can make withdrawals, and if you withdraw enough to bring your balance below the lifetime maximum (or equivalent for your age, if you are younger), you regain that contribution room. You can’t do that with RRSPs.)
Using a TFSA as “a savings vehicle,” Kearns says, “you may make 1% interest. But you can put other investments in your TFSA.”
Here are several types of investments you can hold inside a TFSA. We’ll explain more on each below, including GICs, bonds, ETFs and mutual funds.
Guaranteed Investment Certificates (GICs)
- Hubert Financial (Selkirk Manitoba) at 2.10% – one of the higher interest rate GICs, and short-term for 1 year, offered by Manitoba online bank, Hubert Financial.
- Wealth One Bank of Canada at 2.05% – a secure investment for up to five years with GICs from World One Bank, a Schedule I Canadian-owned bank
- People’s Trust at 2.10% – fixed-rate GIC from People’s Trust, which is based in Vancouver, but has branches in Vancouver, Toronto and Calgary.
How these GICs fit on into our best TFSA investments in Canada is based on the secured annual interest rate that you’ll earn.
What is a GIC?
GICs are kind of like bonds, in that you’re directly giving money to a big company—likely a bank, credit union, mortgage or insurance provider—with a determined interest rate return. You are giving them money so that they may loan money to their customers. You can buy them directly through the companies or through a third party, like an online brokerage. As mentioned with bonds above, GICs can fall victim to inflation, as the return on the GIC may not keep pace with the purchasing power of your original investment, meaning your money could lose value over time.
Are GICs safe investments?
These are considered pretty safe investments, says Kearns, especially with the predetermined maturity date and insurance rate. But banks et al. aren’t immune to desperate times—like, oh, you know, pandemics and recessions. However the Canadian Deposit Insurance Corporation, “protects eligible deposits at each of our member financial institutions to a maximum of $100,000.” And that includes GICs.
Also, with GICs from insurance companies, you can get additional benefits, including the ability to list a beneficiary, annual payouts and more.
Select “TFSA” in the comparison tool below to find some of the best TFSA GIC rates from Ratehub’s partners.
Best GIC Rates in Canada
- Individual government bonds at federal, provincial and municipal levels – supports government spending, with varying maturity levels.
- Corporate bonds – helps raise funds for companies for a variety of business efforts, such as operations and expanding business, with predetermined maturity dates.
- Mortgage-backed securities – gives banks and mortgage companies more liquidity, as you buy into a pool of loans, benefitting from the earned interest, with predetermined maturity dates.
The best TFSA investments in Canada include bonds because they pay interest income to investors and are taxed at the highest rate, so a TFSA can be an efficient way to avoid increasing taxable income and paying more tax, says Kearns.
What is a bond?
A bond is basically a loan you give to a company or level of government. According to the Government of Canada, “A bond is a certificate you receive for a loan you make to a company or government (an issuer). In return, the issuer of the bond promises to pay you interest at a set rate and to repay the loan on a set date.”
There are two times you can buy a bond: One, when the bonds are initially issued to sell; and, two, as a resale. So, you may be able to directly buy the bond, but when it comes to resale, you’ll buy it from a broker, and it will be traded and sold for the best rates by a portfolio manager. Fees are worked into the price of the bond. At maturity, you are paid back the initial value of the bond, plus interest.
Are bonds safe investments?
Bonds are considered safe, because you don’t lose your initial investment in the bond when it matures. The reason you’re safe with bonds, says Kearns, “is that these companies [and governments] who borrow with bonds must have the cash flow to be able to pay the secured interest back to the investor.” Even if a company goes bankrupt, the bond lenders are among the first to be paid legally. And, this year, a record number of bonds are available for Canadians, reports The Globe and Mail.
Essentially, what you see is what you get. However, buying and selling bonds is dependent on the market. The prices can depend on the appetite for the bond. It’s considered a conservative investment. One risk may be with longer terms, where the bond loses its value based on inflation.
Exchange-Traded Funds (ETFs)
- RBC iShares – simple, low-cost, sustainable, diversified exchange-traded funds (ETFs) from BlackRock Canada and RBC Global Asset Management Inc.
- BMO Exchange Traded Funds – a range of ETFs with low volatility, managed by BMO
- Vanguard Investments Canada Inc. – low-cost, well-balanced ETFs with a wide range of investments, which are managed global investment firm Vanguard.
We added ETFs to our list of best TFSA investments in Canada, because these ETFs are a low-cost and simplified way to invest in a variety of investments for your TFSA. And they can be found in “D-I-Y portfolios on self-directed investment platforms and also as part of managed portfolios run by providers, like Questrade* and Wealthsimple*,” says Kearns.
What is an ETF?
ETFs are more of a cocktail, compared to a single-company bond or stock. When you invest in ETFs, you’re investing your money into a selected group of companies. ETFs are traded and sold on exchanges, very much like stocks, because they hold stocks, commodities and/or bonds. Most ETFs are “passively managed,” meaning that the buying and selling of the underlying investments are based on overall market, economic and industry trends. You can opt for “actively managed” ETFs, where the fund managers buy and sell the investments in an effort to beat the market for better gains. That’s a risk, though, as they are not always successful, which may cost you. ETFs are also often compared to mutual funds for their lower costs (more on that below).
Are ETFs safe investments?
ETFs are generally managed based on the type of industry or commodity, to buy and sell what is in the ETFs, so that you don’t have to and so that your interest returns are (hopefully) in line with your expectations. That can result in lower fees for you. Brokerage fees are added on to the cost of the ETFs, which work out to about $10 or less per $1,000 invested, reports The Globe & Mail, compared stock brokerage fees, which can double or quadruple that. However, there’s no guarantee with ETFs; their value can fluctuate with the market, as they are bought and sold on market exchanges, such as the Toronto Stock Exchange.
When you buy ETFs, from financial brokers, independent advisors and online firms Kearns mentioned above, like Wealthsimple and Questrade, you will be asked a few questions to determine your aversion to risk. So, be honest, about your expectations so that you can be best matched with ETFs that you’ll be happy with.
- RBC Global Asset Management’s Select Portfolio – includes lower-than-average fees, along with portfolio rebalancing, managed by the investment arm of the Royal Bank of Canada.
- Mackenzie Canadian Growth Fund – suited for those with more risk tolerance, these mutual funds are offered by one of Canada’s largest investment firms, Mackenzie Investments.
- TD US Mid Cap Growth Fund – a Canadian mutual fund with some risk, investing in equity securities in the U.S., through TD Asset Management.
In Canada there are literally thousands of mutual funds to choose from, says Kearns. So you have options based on how interested you are in monitoring the mutual funds and your aversion to risk.
What is a mutual fund?
As noted above, ETFs are often compared to mutual funds, especially for those shopping for the best TFSA investments in Canada. Mutual funds have been around for longer than ETFs, but work very much in the same way, offering a basket of several different investments. The difference lies in how you buy them. Mutual funds are valued at a set price at the end of the trading day, where ETF prices can fluctuate at any hour, depending on the stock market, says Kearns. You can buy mutual funds for your TFSA from a broker, but you can also acquire them from banks, credit unions, independent advisors and so on. Often it involves setting up an account online, doing a quiz about your risk tolerance, and specifying how much money you want to contribute.
Are mutual funds safe?
Mutual funds, as noted with ETFs, are much more volatile than bonds or GICs. But most are actively monitored by a fund manager. So, these are the most expensive of this bunch of TFSA investments because of its high-maintenance nature. The mutual fund fees, covering administrative and operating costs, are referred to as Management Expense Ratio (MER). Depending on the types of mutual funds you invest in (series A to F), the MERs can vary. Generally speaking, the MER is around 2%, which covers the financial advisor’s services and advice. “This is reasonable if the client is receiving personalized advice and has a customized financial plan in place,” adds Kearns. “There are funds at 2.5% and higher. Unless the fund has relative exceptional historical returns, then the fee is likely too high. At 2% or less would be ideal for total fees being paid by the client.”