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  • Go beyond saving: 6 ways to invest your TFSA

    Go beyond saving: 6 ways to invest your TFSA
    Published September 12, 2012
    Go beyond saving: 6 ways to invest your TFSA
    If you’re using a TFSA just to store extra cash, you’re missing out on many of its biggest benefits...

    When it comes to Tax-Free Savings Accounts (commonly known as TFSAs), we’ve got good news...and not-so-good news. First the good - nearly half of all Canadians now have a TFSA (it’s about time!). Unfortunately, only 21 percent of them have an investment-style account, and most are only using their TFSAs to store extra funds, according to a recent CIBC poll.

    While we’re all for saving in any form, there’s one big problem with failing to invest your TFSA: you’re missing out on its benefits. That’s because unlike an RRSP, a TFSA is funded with after-tax dollars. Its claim to fame is that any growth and gains on your investment - such as capital gains, interest and dividends - are protected from all tax. As such, if you don’t rack up some interest and returns, you’re missing out on the TFSA’s tax-free advantages.

    Now, we’d venture to guess that many of you aren’t investing because you’re confused about the investment options for a TFSA. Well, throw that excuse away! We’re about to give you the rundown of all the choices you have at your disposal to truly put your money to work...

    Ultra-safe saving
    Not a high-rolling investor? No problem. There are many low-risk investments you can put in a TFSA that’ll help you maximize its benefits – without having to take on too much risk. While you won’t get ultra-high returns, you will get the added benefit of keeping every dollar of interest you do earn, rather than sharing a cut with the tax man.

    1) High-interest savings account
    If you plan on dipping into your TFSA often or are saving up for a big-ticket item, a high-interest savings account may be the way to go. In this way, you can use your TFSA just like any other savings account, but still maximize your rate of return. Remember, there are no tax consequences to withdrawing from your TFSA - so if you’re earning interest on a good chunk of money, why not ensure that interest is tax free? Using a TFSA in this way can help you to meet short-term savings goals and make the most of your savings.

    2) Guaranteed Investment Certificates (GICs)
    Like savings accounts, GICs also have a guaranteed return, but they may score you a little higher interest rate – with one caveat: there are often penalties involved with withdrawing them before they hit maturity, which might happen in a matter of months or after several years. That’s why GICs aren’t a great choice if you plan to dip into your funds on a regular basis. However, if you have a long-term goal in mind, a GIC can be a good way to boost your returns. Plus, their early-withdrawal penalties will keep you from cashing in early, helping you to stick to your savings plan.

    3) Bonds

    Bonds are essentially a loan that you, the investor, makes to a company or government. When they mature, you get your investment back, plus interest. However, bonds carry a bit more risk than GICs because they are traded on the open market, which can cause their prices to fluctuate. How safe they are also depends on who you buy them from; while the government is typically a good bet in terms of paying its debts (in North America, at least), some corporate bonds come with higher risk. Despite these drawbacks, bonds are a popular investment for strong-and-steady investors. Plus, like all the investments on this list, they’re a great choice for making the most of your TFSA’s tax-free returns.

    A pinch of risk
    If you’re looking to venture into investments that’ll give you a little more bang for your buck, there are plenty of choices - even if you don’t quite have the stomach for the stock market’s ups and downs. Just remember to do your research. Some of these investments are plagued with high fees and/or mediocre returns.

    4) Mutual funds
    Mutual funds are a bit of a sweet spot in the investment industry. They offer exposure to stocks, commodities or other investments, but because they’re professionally managed and pooled together, they generally fluctuate less than individual stocks. Unfortunately, the fact that they’re well-suited to so many investors is a bit of a catch-22 in terms of supply and demand; people like mutual funds, so there are literally thousands to choose from, which can make it hard to decide which one will be of greatest benefit to your portfolio. Indeed, mutual funds invest in different types of assets, carry different levels of risk and include different fees. It’s important that when you choose a mutual fund, you assess these variables to ensure that you’re getting the one that meets your needs; a financial advisor or financial professional can help.

    5) Exchange-traded funds (ETFs)
    Exchange-traded funds are similar to mutual funds in that they pool money together to buy a specific group of investments. The difference is that while a mutual fund can invest in any group of securities and is often handled a portfolio manager, ETFs are set to mimic a specific index or benchmark, such as the S&P 500 or the TSX. In other words, an ETF is designed to behave in the same manner as its chosen index or benchmark, covering its every rise and dive. Because ETFs are set-it-and-forget-it investments that usually don’t have professional managers, they come at a lower cost to investors in terms of fees.

    6) Stocks
    Stocks tend to scare people, but they’re a lot less mysterious than you might think – and the returns they can deliver can make them well worth the effort. The best part is that if you pick a great stock in your TFSA, you get to enjoy those returns – be they hundreds, thousands, or tens of thousands of dollars - tax free. And while the opposite is also true (you could pick a loser stock), using a TFSA to invest in the stock market in a diversified manner is the closest thing there is to a free lunch. After all, where else can you (legally) earn as much money as you want without paying a penny in taxes?

    Catapult your cash
    Canadians are increasingly fueling up their TFSAs. That’s a good start, but what’ll catapult that cash into real capital is investing it. So rather than letting those funds languish in a low-interest account, do what you can to make the most of your TFSA’s tax-free benefits. It’s about accessing all the opportunities for your money to earn more money...tax free!

    About the Author/Partner: GoldenGirlFinance.ca is a free personal finance and education site for women.
     
    Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.

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