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TFSAs can hold a wide range of investments—they aren’t just a place to park your cash (although you can do that, too). Before we get into eligible TFSA investments, let’s review what makes these accounts so useful.
The TFSA’s superpower: tax-free investment growth
Why open a TFSA? Any money contributed to a TFSA and any income earned in a TFSA—including interest, dividends and capital gains—are tax-free forever! Here’s an example: If you invest $10,000 in an exchange-traded fund (ETF) held within your TFSA and the value of your investment grows to $22,000 over the next 10 years (assuming an annual growth rate of about 8%), the $12,000 gain is tax-free.
TFSAs have annual contribution limits, indexed to inflation. In 2023, the limit is $6,500. When the account was introduced in 2009, the limit was $5,000, and since then, it has increased by $500 every few years, with one exception—in 2015, when the annual limit was $10,000.
Your TFSA contribution room starts to accumulate the year you turn 18, even if you haven’t opened an account yet. Your contribution room is the sum of the following:
- The current year’s limit
- Your unused contribution room from previous years
- Any withdrawals made in the previous year
What’s the maximum possible contribution room? If you’ve been an adult and a resident of Canada since 2009—and have never contributed to a TFSA—you have $88,000 of room, as of 2023. (Check your TFSA contribution room with MoneySense’s calculator.) To open a TFSA, you must have a valid SIN, be at least 18 years old and be a resident of Canada (and be in the country at least 183 days of the tax year).
When you withdraw from a TFSA, you retain your contribution room, but any withdrawals can only be re-contributed to a TFSA in the next year. Be careful not to over-contribute in any given year, or you’ll be subject to a tax of 1% on the excess amount, for every month it’s still in your TFSA.
What investments can you hold in a TFSA?
As mentioned above, a TFSA can hold a wide range of investments and is a very versatile investment account. Qualifying investments are the same as those for an RRSP, including:
- Mutual funds: Mutual funds are pooled investments that hold a portfolio of securities, such as stocks, bonds or alternative assets. Investment income earned from these funds could be interest, dividends or capital gains.
- Exchange-traded funds (ETFs): ETFs are also pooled investments that hold a portfolio of securities, such as stocks, bonds or alternative assets. Like mutual funds, they may offer diversification; however, unlike mutual funds, ETFs are bought and sold on an exchange and may be more cost-efficient than comparable mutual funds.
- Stocks: If you hold the stocks, or shares, of individual companies, you could earn dividends or capital gains. (You may also have capital losses, which in a TFSA can’t be claimed against capital gains, unlike in a non-registered investment account.)
- Bonds: If you buy a government or corporate bond, you’ll receive a fixed interest rate for a predetermined period, and your capital will be returned when the bond matures. Bond investors may earn interest, capital gains or both.
- Guaranteed investment certificates (GICs): A GIC is an investment that guarantees a fixed rate of return over a period of time.
- Cash or cash equivalents: This includes savings accounts and money market funds.
Why consider ETFs for your TFSA?
ETFs have become very popular with Canadian investors, especially young and new investors, because they offer the following: