TFSA Rates of Return
With all the investment options available for a TFSA, it can be hard to decide which are best for your personal financial situation. In almost all cases the investment’s rate of return is probably high on your list of desirable characteristics!
| TFSA Investment Type | Annual Rate of Return |
| Cash | *up to 3% |
| GICs | *up to 5% |
| Mutual Funds | highly variable |
| Bonds | variable & interest-rate dependent |
| Stocks | highly variable |
| ETFs | highly variable |
*These are optimized scenarios and unlikely to apply to everyone all the time. Especially in a volatile interest rate environment, these rates can quickly change. Cut these in half for a more realistic rate of return.
It’s almost impossible to directly compare rates of return amongst the various investment types due to factors such as initial investment, whether it’s fixed-income or not, maturity date, level of riskiness, and the variations in fees.
Initial investment
How much you invest initially will affect the final value of your investment when you withdraw it from your TFSA. Some investments’ final value are based on an annual rate of return percentage, while others fluctuate in value day-to-day or even hour-to-hour. But in all cases how much you started with will affect how much you end up with…a $1000 starting figure will net you more than a $500 starting figure!
Fixed-income or not?
A fixed-income investment such as a bond guarantees a certain rate of return over a certain time period ranging from 1 month to 30+ years. In essence, you know how much you’ll end up with so long as you respect the maturity date.
Unlike fixed-income, investments such as stocks have a “floating” rate of return which is tied to market forces. If the market is up, your investments could be worth much more compared to when the market is down. In this scenario you don’t have a guaranteed rate of return, and indeed you could end up with less money than when you started!
Maturity date
If your investment has a maturity date then you are “locked in” for that period of time if you wish to take advantage of the guaranteed rate of return. Generally-speaking, the longer your maturity date, the higher your rate of return. This is because the longer you wait, the more you risk that inflation or higher interest rates will reduce the value of your investment. Banks will offer higher rates of return on these riskier, longer-maturity investments as an incentive to you.
Riskiness of investment
Some investment types are inherently more risky than others. For example, investing in cash, GICs, and bonds is very low-risk as you are guaranteed a certain rate of return. However stocks, mutual funds, or ETFs potentially carry more risk. Within each type of investment there is a myriad of choices which you can choose depending on your investment style and risk tolerance. So if you choose a high-risk investment such as a leveraged emerging-market stock, you could win big or you could lose big. This is not going to happen with a low-risk money market mutual fund!
Various fees
Another factor influencing the final value of your investments has to do with the various fees you’ll pay to the bank or brokerage firm managing your TFSA. There can be a fee for pretty much every aspect of holding a TFSA:
- TFSA setup fees
- annual management fees
- commissions on trades
- transfer fees within or between financial institutions
- TFSA closing fees
Depending on your bank or brokerage firm, or if you are self-investing, the specific makeup of your fees will vary. Most institutions don’t charge a setup fee but will charge you commission on all transactions. Others may charge a fee to transfer funds between institutions, but not within the same one. MERs on mutual funds and bonds can be expensive. So unless you keep careful accounting records you may not know your investments’ final value until you actually withdraw the money!