Eligible TFSA Investment Options
Most people will use their bank or credit union to open a TFSA; the other option is a self-directed TFSA.
Many banks will suggest that your TFSA should consist of low-risk, low-yield investment instruments such as GIC’s or interest-yielding savings accounts. However, the bank will only pay you a low interest rate (1-2%) on your money that they will then lend out at a higher rate. Alternatively, shrewd investors will consider investing in (higher-risk but higher-yielding) stocks, bonds, ETF’s, income trusts, or a combination of these. Choose the combination that is right for your financial situation and comfort level, and remember to review this mix every so often.
Interest yielding savings accounts
Opening a TFSA with Tangerine or with similar financial institutions will currently produce yields of around 2-3% per annum. This means that for every $5500 you invest in one of these accounts, you’ll make approximately $150 after one year. This approach is recommended if you’re very leery of investments, are extremely risk adverse, or aren’t ready to make long-term investment decisions.» Find out more about TFSA savings accounts
Similar to interest-yielding savings accounts, the returns on GICs (Guaranteed Investment Certificates) these days are extremely low. GICs also have the added disadvantage of tying up your money for a designated period of time (30 days, 90 days, 1 year, etc.). So even though you can technically withdraw money from a TFSA at any time, if that money is tied up in GIC’s you may have to wait for them to mature. And with interest rates increasing, it may also not be wise to lock in your money for years at a time. Short to medium term GICs (3 years or less) may be suitable for some; your choice will depend on your personal financial situation and comfort level.
» Find out more about GIC's held within TFSA's
Investing in high-yield bonds can be a good strategy for some TFSA holders. Retirees are notorious for loving bonds, and as money held in a TFSA does not influence government benefits such as OAS or GIS payments, bonds held in a TFSA account can be a good choice.
» Find out more about bonds held within TFSA's
Stocks, ETF’s, and the like
You can open a self-directed TFSA through Questrade or similar brokerages, which can provide opportunities to invest in options, stocks, ETF’s, or income trusts. Investing in dividend-yielding investments can be especially lucrative, as any dividends you receive won’t be taxed. Just remember that when investing in Canadian companies in your TFSA, the CRA dividend tax credit will not apply here. For some, investing in foreign dividend companies might be a good option.
» Find out more about stocks held within TFSA's» Find out more about ETF's held within TFSA's
If you’re unfamiliar with the stock market, but are looking to make better returns than what savings accounts and GICs offer, investing in some high-quality mutual funds can be a good choice. Talk with a financial advisor to find out what type of funds would work for your personal financial situation. Watch out for high MER’s (management expense ratios) on some mutual funds, as your returns could be lower than anticipated if you choose ones with high management fees.
» Find out more about mutual funds held within TFSA's
Certain shares of small businesses
If you own shares in a Canadian small business, you can invest them in a TFSA, provided you don’t hold more than 10% of the company’s stock at the time. The small business in question doesn’t have to be publicly traded but it does have to be Canadian (ie more than 50% of the employees must be in Canada). If you are thinking of doing this, check with your financial institution to confirm they allow this (as not all do).