How to Invest your TFSA: 6 Ways to Do It - Genymoney.ca (2024)

Invest in a TFSA… that’s the best way to use the TFSA. It’s been over 10 years since the TFSA was introduced in 2009, and there are plenty of Canadians who still think that the TFSA is a savings account. I have stepped up on my Canadian PF blogger soap box plenty of times to say that the TFSA should not be used as a savings account.

Maybe initially when the TFSA first came out, yes, when the contribution limits were low but now, having a $88,000 emergency fund savings account just does not seem like a good use of tax sheltered room.

I’m not sure who would really need a $88,000 rainy day fund savings account, but I think that’s a little excessive. Even for the risk averse like me, who like to save money for rainy days.

I do live in Vancouver, after all.

There are plenty of TFSA articles out there in the Canadian personal finance world, but I thought I would also add my own.

What is a TFSA?

A TFSA stands for Tax Free Savings Account.

It was introduced in 2009 and anyone over the age of 18 is eligible to open one.

Just like the RRSP (Registered Retirement Savings Plan), you can hold a variety of investments within a TFSA. The TFSA is not a savings account but is just a ‘basket’ to hold your investments. Your investments in the TFSA are made with after tax income.

Whatever investments you put in your TFSA basket are treated differently. They are tax sheltered. That means you don’t have to pay any taxes on the earnings on your investments inside the TFSA and you don’t even have to pay taxes when you withdraw the money out of the TFSA. The TFSA is an amazing retirement savings vehicle, and whoever still has a TFSA as a savings account should really wake up and smell the TFSA roses.

You do have to pay a 15% tax on foreign dividends though held within a TFSA.

Here are the TFSA contribution limits in 2023.

If you have not contributed the maximum amount each year, the unused balance can be carried over as contribution room for the following year. You can check how much you have using the Canada Revenue Agency site, My CRA (though it’s not updated for the current year).

There’s lots debate whether you should invest in an RRSP first or a TFSA first, and there are a number of factors. In my opinion, here’s which one you should invest in first.

You can even retire on a TFSA if you start early enough.

How to Invest in a TFSA

Here are some ways to invest in a TFSA that will give you returns that will knock the pants off any TFSA interest rate that you can get at RBC bank or TD bank or wherever. If you’re not ready to abandon a principal protected investing style within your TFSA, you can always continue to have your TFSA savings account but add on TFSA investment accounts.

This is because you can have however many different TFSA accounts you want, but you just need to keep track and avoid TFSA over contribution. You can have however many TFSA accounts at however many financial institutions you want. However, you have to be aware of the TFSA withdrawal rules to avoid getting dinged.

As you can anticipate, the more accounts you have the more difficult it is to keep track of your TFSA contribution room, and more chance to over contribute.

Related: My TFSA Over Contribution and How I Fixed It

Over contributing to a TFSA can yield a bill of 1% of your over contribution amount multiplied by the number of months that you have over contributed. There can be a delay from when you receive the notice so it can add up.

Anyway, TFSA’s are great, and here are a few ways that you can invest your TFSA.

TFSA Savings Accounts and GIC’s

The most common way that Canadians are investing with the TFSA is with TFSA savings accounts and GIC’s. These are very safe options and your principal is protected, meaning you won’t lose money but the upside (or downside) is that you won’t gain very much money because the returns are small.

For example, at the time of writing, here are some TFSA savings account interest rates available:

• TFSA Interest Rate RBC
• TD TFSA Interest Rate
• CIBC TFSA rate
• TFSA Interest Rate Tangerine
• Motive TFSA Savings Account

Here’s my review of Motive Financial Savvy Savings Account and my review of the Tangerine Savings Account. I’m a fan of both though these are just general savings accounts.

As you can see, the returns aren’t very high (especially from the big banks).

There are ways to get much higher returns with your TFSA in order to see the true powerful effect of compounding.

I have had a TFSA since 2009 and have raided it for a home purchase in 2012. I have reached a six figure TFSA in 2020 in 11 years.

This would not be possible had I had the TFSA at 2.40%.

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TFSA In Mutual Funds with An Advisor

Probably the default way to invest with a TFSA is to invest in mutual funds with your big bank’s financial advisor. I say default because when you step into a brick and mortar bank, they often ask you about investing, and then you set up an appointment with the bank’s investment advisor, and then you are often shepherded into purchasing mutual funds through your bank. Mutual funds are known to have high management expense ratios (MERs) that can be at least 2-3%.

Or an alternative scenario is where you go to an investment seminar and end up buying mutual funds from a Fidelity financial advisor as well. I know this because that’s how I got started with investing (though this is before the TFSA came out).

For example, Investor’s Group Allergro Aggressive Portfolio B had returns of 6.64% in 2019 last year and the MER was 2.71%. Net returns (not including loading fees) is 3.93%. I use Investor’s Group as an example because that’s who I started with when I started investing.

Thankfully I got out of that soon after, when I realized I wasn’t making any money. That return is pretty sh*tty especially when the S&P/TSX composite returned almost 15% last year. You can see a list of all the funds in Canada from Get Smarter About Money’s website (a website from the Ontario Securities Commission).

There are other options however, that will cost you much less over the long term. They are important to consider because you should start thinking of the TFSA as a long term retirement plan. 1% may not seem like very much in terms of fees, but it will cost you more in the long term.

You don’t have to be scared of DIY investing.

E-Funds with TD E-Series or Tangerine Bank TFSA

A cheaper option is to buy mutual funds or electronic funds, like with TD Bank’s TD e-series and Tangerine Bank’s Investment funds. The benefit to these if if you are investing small frequent amounts, because you don’t have to pay a commission every time you invest.

However, with some discount brokerages offering free ETF purchases, investing in TD e-series and Tangerine Bank’s Investment Funds have been less favourable. If you are retired and doing frequent small drawdown of your portfolio, taking money out of these funds is more favourable because you don’t have to pay a commission each time you sell.

Here is a list of the portfolios in the Tangerine investment funds and my review of the Tangerine Investment funds. The MER cost of these portfolios is between 1.07% to 1.10%. The best thing about the Tangerine Investment funds is that they are automatically rebalanced on a quarterly basis.

Alternately, you could invest in a lower cost TFSA vehicle, the TD e-series account. TD e-series recently lowered the cost of the MER in 2019, and the MER is between 0.32% to 0.52%.

Here’s a step-by-step guide on open, invest, and rebalance with the TD e-series funds.

The tricky thing with these funds is that you have to rebalance the TD e-series yourself. Rebalancing isn’t difficult but if you are interested in being completely hands off with your investing, these funds may not be for you. Rebalancing is important because you want to keep a correct asset allocation, to avoid Canadian home bias, for example.

Here’s a comparison between TD e-series and ETFs and which one might be better for you.

Use a Robo Advisor For your TFSA

A robo advisor is a financial technology “fintech” product where you can invest your money on autopilot and you don’t have to worry about rebalancing. You just need to deposit the money to invest, and your money is invested automatically into an exchange traded fund portfolio (there are no individual stocks, no active management, just a portfolio of ETFs that are rebalanced).

You will be tracking the index instead of trying to beat the market. With a robo-advisor, your money is automatically rebalanced and you don’t need to be making any trades to make sure you have the correct asset allocation.

There are a number of robo-advisors available in Canada (14 or 15 of them in total). You save money with a robo advisor because you’re not paying the average 2.25% mutual fund MER fee. You’re fighting against inflation and potential poor returns with your investments, so it makes sense to keep the fees as low as possible.

The robo advisor charges you a robo advisor fee (usually somewhere around 0.40% to 0.50% of your assets under their management and also charges you the ETF MER (usually around 0.20-0.25% on average). So, on AVERAGE, a robo advisor will cost you somewhere around 0.70% to 1.00% annually.

This is peanuts compared to 2.25% of a mutual fund, but if you are interested in DIY investing and rebalancing yourself or opening up a brokerage account, you can lower your annual investing cost from 0.70% to an even lower number.

There are 15 robo advisors available in Canada, some of the more notable ones are:

• CI Direct Investing
• Wealthsimple: The largest one with the biggest slice of the robo advisor pie, 4 billion assets under management
• Questwealth
• Nest Wealth
• Justwealth
• Invisor
• ModernAdvisor
• RBC InvestEase
• BMO Smartfolio

Here’s an in-depth comparison between robo advisor investing with Wealthsimple and WealthBar.

Although robo advisors have gained a lot of headway (over $6 billion in assets are managed under robo advisors in Canada), it still pales in comparison to the mutual fund and ETF assets managed.

I think a robo advisor is a great option for those who are just starting investing and want to dollar cost average.

Robo advisors are also used by recently retired folks as well, who have lost trust in their mutual fund advisor and were paying high fees for years.

DIY Invest in an Online Discount Brokerage For your TFSA

As mentioned there’s a way to invest in your TFSA for even cheaper.

I’ve been using my Questrade TFSA since 2009 when the TFSA first opened up. My Questrade TFSA has finally hit $100,000 in value (at least momentarily) and is a combination of some of my favourite Canadian dividend stocks and exchange traded funds. I use a hybrid approach but investing straight into ETFs that rebalance themselves is a great option to invest your TFSA.

Here’s a step-by-step guide on how to invest in a TFSA with Questrade.

All-in-one ETFs are a great option, and don’t require rebalancing, they rebalance themselves.

All you need to do is open a discount brokerage like Questrade that doesn’t charge for ETF purchases, and you’re set to invest on a monthly basis whenever you have money saved up.

You do have to pay commission when you sell ($4.95/trade), but when you’re in the accumulation of income producing assets phase, this is a moot point.

Here are some All-in-One ETF options:

Vanguard Asset Allocation ETFs:

• VCIP (MER is 0.25%) Vanguard Conservative Income Portfolio ETF is 80/20 split between fixed income and equities.
• VCNS (MER is 0.25%) Vanguard Conservative ETF Portfolio is a 60/40 split between fixed income and equities
• VBAL (MER is 0.25%) Vanguard Balanced ETF Portfolio is a 60/40 split between equities and fixed income
• VGRO (MER is 0.25%) Vanguard Growth ETF Portfolio is a 80/20 split between equities and fixed income
• VEQT (MER is 0.25%) (all equity) Vanguard All-Equity ETF Portfolio is a 100% equity all-in-one ETF, 40% USA and 30% Canada

The distributions for these Vanguard All-In-One Portfolio ETFs are paid quarterly.

Vanguard is a world leading asset manager, with $6 TRILLION assets under management.

Here’s VGRO ETF’s sector weighting

Horizons One Ticket Solutions ETFs:

• HCON (MER is 0.17%) Horizons Conservative Tri ETF portfolio is a 50/50 split between equities and fixed income
• HBAL (MER is 0.18%) Horizons Balanced Tri ETF Portfolio is a 70/30 split between equities and fixed income
• HGRO (MER is 0.19%) Horizons Growth Tri ETF Portfolio is a 100 equities ETF, 16% in Canada, and 28% USA, and 56% developed ex-North America

The distributions for these Horizons One Ticket Solutions ETFs are paid annually with Horizons, if any.

The Horizons One Ticket Solutions ETFs are meant to be very tax efficient and to be a good option for taxable accounts (though the TFSA is not considered a taxable account)

iShares One Fund ETFs:

• XBAL (MER is 0.20%) iShares Core Balanced ETF, about a 60/40 split between equities and fixed income
• XGRO (MER is 0.20%) iShares Core Growth ETF, about a 80/20 split between equities and fixed income with a pretty good distribution yield of 2.80%.

The distributions for these iShares One Fund ETFs are paid quarterly.

BMO ETF Portfolios

• ZCON (MER is 0.20%) BMO Conservative ETF, a 60/40 split between fixed income and equities.
• ZBAL (MER is 0.20%) BMO Balanced ETF, about a 60/40 split between equities and fixed income and a distribution yield of 2.27%
• ZGRO (MER is 0.20%) BMO Growth ETF, about a 80/20 split between equities and fixed income with a quarterly distribution, approximately 2.2%

Building a safe portfolio of ETFs (exchange traded funds) to track the index is probably the best way to invest in a TFSA. I would stick to Canadian ETFs within the TFSA or Canadian dividend stocks. A US based ETF (even Canadian hedged) would be best kept outside of the TFSA to avoid tax drag.

However, I personally would rather see 20% gains investing with US equities included rather than worry about paying a small amount of taxes and having a lagging 100% Canadian portfolio.

Here’s more on tax efficient investing strategies in Canada.

Although you don’t need to rebalance with a one ticket ETF that automatically rebalances, you could consider using something like Passiv which helps you rebalance. It is free for Questrade users.

Invest Your TFSA with Dividend Paying Stocks

Finally, you can also invest your TFSA with dividend paying stocks. Personally most of my Questrade TFSA consists of investments in Canadian dividend paying companies. This is not optimal as dividends from Canadian dividend paying corporations are taxed very efficiently, but I like to see no tax at all on some of my Canadian dividend paying stocks. I try to put my Real Estate Income Trust investments (REITs) in there to maintain tax efficiency.

Here are some of my favourite Canadian dividend paying stocks that like to buy and hold forever, with Fortis being one of them.

Here’s Fortis’ dividend history– since 1972 they have been paying dividends.

Questrade is offering $50 free trades ($4.95/trade) when sign up through this link.

You can set up a Questrade drip for your ETFs or dividend paying stocks and buy more when you get paid out dividends or distributions, growing your investment snowball.

Investing in A TFSA Summary

Hope you found this TFSA investing guide helpful. If you’re looking for more ways to invest, here’s a how to guide to invest as a millennial. Here’s also how to invest in Canada.

• Invest your TFSA in GIC’s and Savings (the ‘conventional’ route)
• Invest your TFSA with a mutual fund
• Invest in a TFSA through TD e-series or Tangerine Investment Funds
• Invest your TFSA with a robo advisor
• Invest your TFSA with a discount brokerage and use an All in One ETF
• Invest your TFSA with dividend paying companies

I think the best (and safest) way to use your TFSA is to do an All In One ETF. Take the ego out of investing and automate it.

The TFSA is the last account that you draw down for tax optimization and you can keep it until your death. Here are more retirement projections to help you think about taxes.

After all, Warren Buffett, the greatest investor of all time, recommends that most people should just invest in index funds according to Business Insider.

If you are interested in learning more about personal finance, here is my review of Enriched Academy and whether it is worth the price.

You may also be interested in:

• Best way to invest money in Canada

What do you use your TFSA for?

Do you use your TFSA for savings? For Retirement? For a Fun Fund?

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