By Aditya Nain on September 13, 2023
Estimated reading time: 7 minutes

What investments can I put in my TFSA?

By Aditya Nain on September 13, 2023
Estimated reading time: 7 minutes

TFSAs can hold more than just cash. Get to know your TFSA investment options, including some Fidelity All-in-One ETFs that offer portfolio diversification.

A woman readers about Fidelity ETFs on her laptop at a cafe

Image by senipetro on Freepik

The less tax you pay, the more money you keep for yourself. How can you apply this to investing? By using registered investment accounts like the tax-free savings account (TFSA) and the registered retirement savings plan (RRSP). The TFSA is often the first investment account a new or young investor opens because, unlike the RRSP, your contribution room isn’t based on your income. So, you can invest in a TFSA even if you earned little or nothing in a particular year.

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:

Diversification: ETFs pool money from thousands of investors to buy a portfolio of securities. An ETF portfolio may hold hundreds or even thousands of securities spanning different asset classes, industries, regions or other categories. This diversification can mitigate investment risk by helping to ensure that the ETF’s holdings do not all move in the same direction when market conditions change.
Lower fees: Management expense ratios (MERs) for ETFs in Canada typically range from under 0.1% (for passively managed index-tracking ETFs) to 0.5% and above (for actively managed or alternative ETFs such as crypto ETFs). This is generally lower than mutual fund MERs, which vary from under 1% to over 3%.
Professional management: If you don’t have the time or inclination to do your own investment research or make trades, an ETF can save you the trouble. You’re essentially outsourcing the heavy lifting to a team of professionals.
Ease of purchase and sale: Anybody with a brokerage account can buy and sell ETFs just as they would stocks. If you manage your own portfolio, you could opt to hold a number of different kinds of equity ETFs, plus other asset classes such as bonds, commodities or crypto. Or, for a simpler, lower-maintenance option with exposure to multiple asset classes, you could consider all-in-one ETFs.

What is an all-in-one ETF?

All-in-one ETFs give investors the option of diversifying across asset classes within a single ETF, which can make investing simpler and less time-consuming. Fidelity offers the following all-in-one ETFs, with the target asset allocations (approximate) noted below.

Fidelity All-in-One ETFs	Conservative	Balanced	Growth	Equity
Ticker	FCNS	FBAL	FGRO	FEQT
Equity	40%	59%	82%	97%
Fixed income	59%	39%	15%	0%
Crypto	1%	2%	3%	3%

Source: Fidelity Investments Canada ULC

Together, the potentially lower fees of ETFs, the diversified portfolios all-in-one ETFs can offer, and the tax-free growth potential of TFSAs can go a long way in helping to amplify long-term compounding for new and young investors.

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This article is sponsored.

This is a paid post that is informative but also may feature a client’s product or service. These posts are written, edited and produced by MoneySense with assigned freelancers and approved by the client.

An important message from Fidelity Investments Canada ULC

Commissions, trailing commissions, management fees, brokerage fees and expenses may be associated with investments in ETFs. Please read the ETF’s prospectus, which contains detailed investment information, before investing. ETFs are not guaranteed. Their values change frequently, and investors may experience a gain or a loss. Past performance may not be repeated.

The management fees directly payable by the Fidelity All-in-One ETFs are nil. The Fidelity All-in-One ETFs invest in other underlying Fidelity ETFs that charge a direct management fee and/or administration fee. Based on the weightings of underlying Fidelity ETFs, it is expected that the effective indirect management and/or administration fee for Fidelity All-in-One Conservative ETF will be approximately 0.35%, Fidelity All-in-One Balanced ETF will be approximately 0.36%, Fidelity All-in-One Growth ETF will be approximately 0.38% and Fidelity All-in-One Equity ETF will be approximately 0.39%. The actual effective, indirect fees may be higher or lower than the estimated rates shown above based on the performance of the underlying Fidelity ETFs, rebalancing events initiated by the portfolio management team of the Fidelity All-in-One ETFs and changes to the strategic allocation, which may include the removal or addition of underlying Fidelity ETFs. Actual indirect fees will be reflected in the MER (in addition to sales tax, fixed admin fees, commissions, portfolio transaction costs and other expenses, as applicable, of each Fidelity All-in-One ETF and mutual fund version), posted semi-annually.

Each of the Fidelity All-in-One ETFs has a neutral mix, which includes a small allocation to Fidelity Advantage Bitcoin ETF™ ranging between 1% and 3%. If each portfolio deviates from its neutral mix by greater than 5% between annual rebalances, it will also be rebalanced. Such rebalancing activity may not occur immediately upon crossing that threshold but will occur shortly thereafter.

The statements contained herein are based on information believed to be reliable and are provided for information purposes only. Where such information is based in whole or in part on information provided by third parties, we cannot guarantee that it is accurate, complete or current at all times. It does not provide investment, tax or legal advice, and is not an offer or solicitation to buy. Graphs and charts are used for illustrative purposes only and do not reflect future values or returns on investment of any fund or portfolio. Particular investment strategies should be evaluated according to an investor’s investment objectives and tolerance for risk. Fidelity Investments Canada ULC and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered.

The presenter is not registered with any securities commission and therefore cannot provide advice regarding securities.

About Aditya Nain

Aditya Nain is an author, speaker and educator who writes about Canadian investments, personal finance and crypto. He has co-authored two books and taught at universities for 12 years.

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