Although the name suggests it’s a savings account, a Tax-Free Savings Account (TFSA) is a multi-purpose investment vehicle where you can hold various types of investments tax-free.
Whether saving for a car, vacation, or retirement, learning how to invest in a TFSA is vital to achieving your financial goals and avoiding unnecessary taxes.
Read on to learn how to use a TFSA to make sound investing decisions and the different strategies to optimize this investment account.
The Tax-Free Savings Account (TFSA) is a registered investment account launched by the federal government in 2009. It’s available to Canadian residents who are the age of majority (either 18 or 19) in their province or territory.
The contribution limits are set yearly by the Canadian government. For example, the 2025 contribution limit will be $7,000. Any unused contribution room from previous years can be carried forward. Your lifetime contribution limit begins the year you turn 18. So, if you were 18 in 2009, you would have a contribution limit of $95,000 in 2024 ($102,000 in 2025).
The main benefit is that growth or income (such as interest, dividends or capital gains) from investments within this account is tax-free. Also, the money you withdraw isn’t taxed. Any withdrawals you make in a given year can be added back to your contribution room as of January 1 of the following year. You can hold different types of assets, including cash, stocks, Exchange-Traded Funds (ETFs), Guaranteed Investment Certificates (GICs), High-Interest Savings Accounts (HISAs) and bonds.
How to invest in a TFSA
Are you ready to start investing in a TFSA? Here are the four steps to follow:
First, there are several ways you can open a TFSA account. It can be through a bank, credit union, robo-advisor or an online brokerage platform. You’ll want to compare different providers based on their fees, product offerings and customer service offered to find what’s most suitable for you.
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When your account is open, determine which investments align with your strategy. For instance, low-risk options include bonds and GICs, whereas higher-risk choices may include stocks and ETFs. Your investment strategy should reflect how much risk you’re willing to take and your financial goals.
Next, decide whether your TFSA will help you achieve your short-term or long-term investing goals. For example, short-term savings may include a vacation or down payment on a car, so you may opt for safer investments such as GICs or bonds. Whereas long-term goals, like saving for a home or retirement, could benefit from putting these funds in stocks and ETFs.
Related read: Best ETFs in Canada
To build wealth in your TFSA, make regular contributions to your account. Dollar-cost averaging may be a suitable way to invest a fixed amount of money at regular intervals to balance market volatility.
Be sure to explore the best TFSA providers or brokerage platforms to start investing in a TFSA and reach your financial goals.
TFSA and stocks: How to invest in stocks through a TFSA
A popular way to grow your portfolio is by investing in stocks. When you invest in stocks through a TFSA, your capital gains or dividends are tax-exempt. This can accelerate the growth of your investments.
For example
If you buy $4,500 worth of stocks in your TFSA at a discount brokerage, and it grows to $6,000, you can withdraw the funds without paying taxes. Hence, TFSA and stocks work well together as a long-term investment strategy.
The pros of investing in stocks within a TFSA are that it has the potential for high returns and it provides dividend income and tax-free capital gains. However, the cons include that there may be higher risk due to market volatility, which could cause your portfolio to drop in value.
TFSA ETFs: A beginner-friendly investment option
An ETF may be the solution you’re looking for if you want instant diversification. An ETF is a fund that holds different investments, such as stocks and bonds. You can buy and sell an ETF on the stock exchange like an individual stock. A major draw is that they typically have lower fees, such as management-expense ratios (MERs), than mutual funds.
There are different types of ETFs you can buy in a TFSA:
- Index ETFs mimic the performance of a certain market index, such as the S&P 500
- Dividend ETFs specialize in companies that pay regular dividends
- Sector ETFs invest in select industries, such as financial services or technology
- Asset allocation ETFs are “all-in-one” ETFs with a specific mix of stocks and bonds, such as 60% stocks and 40% bonds. They are low-cost and self-rebalancing.
With their diversification, TFSA ETFs can help reduce your risk compared to buying individual stocks, which is a popular choice for new investors. Since no one can predict the stock market's performance, consider building a portfolio with global diversification and broad industries to spread your risk.
Does a TFSA earn interest?
Yes, you can earn interest if you put your money into a GIC, bonds or a HISA using your TFSA. Any interest earned within this account is non-taxed, making it a better option than a traditional savings account.
The advantage of using a TFSA to earn interest is that it’s safe and you can get guaranteed returns through GICs. However, the drawback is that it offers lower growth potential than stocks or ETFs. Although you can use a TFSA as a basic savings account, using it for investments (such as stocks, bonds and TFSA ETFs) will likely provide higher returns in the long run.
How to maximize returns in a TFSA
Here are three ways you can maximize your returns within a TFSA.
Using a TFSA for retirement and long-term investing
The TFSA can be used to build wealth as part of your retirement strategy. Since withdrawals from a TFSA aren’t taxable, they won’t negatively impact your retirement benefits or move you into a higher tax bracket.
Although TFSAs and RRSPs are investment vehicles that can help you reach your retirement goals, it’s essential to understand the differences between them. While there are various factors to consider, here’s the main difference:
- A TFSA is a good option if you anticipate being in a higher tax bracket in retirement, as withdrawals are tax-exempt.
- An RRSP is ideal for individuals looking for immediate tax deductions and expect to be in a lower tax bracket during retirement.
Learning how to use a TFSA to achieve your retirement goals, in conjunction with an RRSP, can help you optimize your investment strategy.
How do I withdraw money from a TFSA?
One of the best features of a TFSA is the ability to make tax-free withdrawals. Additionally, the amount you earn or withdraw from your TFSA won’t affect your government benefits, such as your Old Age Security (OAS) benefits, the Guaranteed Income Supplement (GIS) or Employment Insurance (EI) benefits. It also won’t impact your eligibility for federal income benefits and credits.
When you need to withdraw money from your TFSA, remember that you may miss out on future gains. Also, any withdrawals made will be added back to your contribution room at the start of the next calendar year. If possible, consider planning your withdrawals to avoid missing out on maximizing the growth of your investments.
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Sandy Yong is the author of the award-winning book, The Money Master: Inside Secrets On How To Make Your Money Grow and Stay Safe. She has been featured in the Toronto Star, NBC News and Yahoo! Finance.
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