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Self-Directed Tax Free Savings Account (TFSA)

by Andrew C. MacDonald on December 30, 2008

TFSA Basics

For 2009, Canadians have been granted a new tax shelter called the Tax Free Savings Account (TFSA). The basics of the TFSA are that the contribution room increases each year (currently $5,000) for every Canadian aged 18 or older. Contributions are made with after-tax dollars, but any gains within the account are tax free, and withdrawls can be made at any time and are not classified as income. Best of all, you can withdraw funds and put them back in without losing your previous contribution room. Using the TFSA rather than your RRSP makes sense under a few circumstances:

  1. You have no RRSP contribution room remaining
  2. Your current marginal tax rate is lower than your anticipated marginal tax rate when you draw from your RRSP
  3. You want to have easy access to your savings

My TFSA Strategy

My strategy with the TFSA will be to use it as a shelter for my more agressive investments to maximize the potential tax savings. As contributions earn interest, capital appreciation, or dividends, the value of the TFSA grows tax free. This new tax shelter is a great way to take advantage of the power of compounding without interference from the government. Since my strategy is to use the TFSA as a shelter for my most agressive investments, a simple savings account TFSA account will not suit my strategy. If you are planning to use the TFSA for this purpose, check out PC Financial which is currently offering 3.75% interest for their TFSA accounts. To invest in more agressive options, self-directed TFSAs are offered by many Canadian brokers. Since the contribution room for the first year is only $5,000, keeping fees to a minimum was one of my main criteria in selecting an account. I won’t be day trading since that would be futile with my strategy and only $5K, so finding a low fee broker with a reliable trading platform was the goal. The fees and high commissions charged by the big banks quickly ruled them out of my search. After reviewing the offerings from many discount brokerages I narrowed my options down and selected Questrade.

Why I Selected Questrade for My TFSA

  • No fees – there are no account fees, inactivity fees, etc.
  • Low balance requirement – currently $1,000 minimum required to fund an account
  • Easy funding – can add a Questrade account as bill payment to fund quickly without any fee
  • Cheap trades – currently $0.01 per share with a $4.95 minimum, and a $9.95 maximum
  • Investment options – Questrade offers stocks & options, forex, gold, mutual funds, and they provide all types of registered accounts for Canadian investors (RRSP, RRIF, RESP, and now TFSA)
  • Good trading platform – works well for me, and provides everything I was looking for
  • Service – was able to speak with a representative quickly, and they were able to answer all of my questions (still have to see how service is once I’ve funded my account next week)

So, as of January 2nd, 2009 the TFSA signup will be available as one of the account types at the Questrade website. If you are looking for a self-directed TFSA, this seems to be the best deal around (at least for the first few years while contribution room is fairly low).

$50 Questrade Referral Bonus

Questrade offers a bonus if you sign up through a referral.  Sign up using the banner below and you will be credited with $50 in free trades, which will keep your 1st year fees to an absolute minimum.

Questrade Democratic Pricing - 1 cent per share, $4.95 min / $9.95 max

If you have any questions, please post in the comments below so others can benefit from the answers.  I’ll be posting more soon with an update on my TFSA strategy. Until then, keep enjoying the holidays, and happy investing.

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{ 13 comments… read them below or add one }

TaxFreeSavings January 5, 2009 at 6:36 am

Thanks Andrew for an informative post on the self-directed TFSA. This is great information for people who are looking for a little bit more out of their standard TFSA. The Questrade offer seems to be one of the most reasonable so far. Thanks for sharing your experiences!

Glenn January 9, 2009 at 2:39 pm

Andrew,
Can you confirm that the company Questrade will allow trading in forex from their TFSA.
Thanks,

Glenn.

Andrew C. MacDonald January 9, 2009 at 2:58 pm

Hi Glenn,

When I was filling out my TFSA application for Questrade online, the option to trade forex was available to me. I didn’t opt for a forex account since I am not interested in using that as part of my TFSA strategy right now, but to the best of my knowledge it is an option.

The live support feature on Questrade has worked well for me, so I’d suggest confirming the availability of TFSA forex trading with one of their agents before signing up.

Cheers,
Andrew

Amitabha Gupta January 28, 2010 at 12:14 am

Hi Andrew

Thank you for the valuable information.
I would like to you to clarify one of my confusions: For example – I put $5000 in tfsa a/c of Questrade and buy some income trust units. Now at the end of the year, supose I earn $400 as an income. Now $400 is sitting in my tfsa a/c but if I want to earn some interest on this amount earned. How is it possible to do so?

Thanks

Andrew C. MacDonald January 28, 2010 at 10:24 pm

Hi Amitabha,

The best way to maximize returns is to enroll in DRIP (a dividend reinvestment plan) so that your entire balance stays invested. I am not sure if this is an option for your units but it can be very effective.

Questrade rates on cash balances are listed on their site at the following address:
http://www.questrade.com/pricing/interest_rates.aspx

Their rates are prime minus and with current rates are effectively 0%, so buy something else with that $400!

Hope that helps.

- Andrew

Vincent February 26, 2010 at 2:06 pm

Hi Andrew,

I think your idea about DRIP is an excellent idea but how could I do that ?

Say if I opened an TFSA at Questrade then purchase some shocks which that company also offer DRIP and SPP. Could I then enroll into that company’s DRIP and SPP plan. Once I enrolled into the plan would Questrade be able to receive the dividend shares or addional shares via SPP and hold them into my TFSA. I am just not sure how does it works. Hope that you can explain that to me. Many thanks.

Andrew C. MacDonald March 1, 2010 at 10:31 pm

Hi Vincent,

I did some poking around and here is one good explanation I found:

Can I DRIP inside my RRSP, RESP or Tax Free Savings Account (TFSA)?
Not in the same, simple manner described on the DRIP Primer, since they are taxable holdings (see Questions #4 & #10 – refer to link below for original questions). But there are other ways, you have 2 options:

A) The easiest would be choosing a Canadian discount broker that offers a Synthetic DRIP. Read Question 10 below if you don’t know what that is. Then buy shares within that account that the Broker will DRIP for you, and ask them to do so.
B) Request a certificate for shares from your regular DRIP and then deposit that “in-kind” to your brokerage account. The upside to this would being able to buy shares for free through your DRIP/SPP and contribute them to your RRSP/RESP/Etc… but the downside is that this contribution would be considered a “sale” (disposition) and you would need to calculate and claim any capital gains.

It sounds possible, but somewhat complex given the current contribution limits just 2 years into the Tax Free Savings Account’s life. Hope that helps, and feel free to browse the link below for lots of great info on setting up DRIP with TFSA.

Cheers,
Andrew

Source: http://sites.google.com/site/cdndrips/canadiandripfaq

Pierre Adair May 27, 2010 at 11:57 pm

You have done it once again! Superb article.

Richard December 27, 2010 at 9:35 pm

I am looking for a brokker that would accept in kind securities that I could place in an TFSA account. The securities is paper money that is not euro, USD or CND.
Do you know of any that would make this happen to me?

Andrew C. MacDonald January 2, 2011 at 3:54 pm

Hi Richard,

I am not sure what the rules for in kind securities are and which brokers allow the paper money you mentioned. It would be best to talk to a Questrade rep, or someone from each brokerage to ask about the specific securities you’re looking to put in your TFSA.

Cheers,
Andrew

Andrew C. MacDonald January 19, 2011 at 12:03 am

Hi Richard,

From what I’ve read in-kind securities can be transferred into your TFSA, but I am not sure which self-directed TFSA providers would allow for the type of securities you mention. I have been happy using my Questrade Self-Directed TFSA account so I’d start by checking with one of their reps if you’re able to hold those types of securities in one of their accounts. If not, try some of the other providers, someone is bound to allow it.

Cheers,
Andrew

Tyler October 31, 2011 at 10:38 am

Hello Andrew, i was just wondering about the standard TFSA options when it comes to GIC & Bonds. Without using a self-direct TFSA could i invest in the Step-Up Bond, Strip Bond or a 5 year Cashable GIC ?
If not, what would you recommend investing in a standard TFSA within The Royal Bank ?

Thank you for your time.

Andrew C. MacDonald November 29, 2011 at 12:03 pm

Hi Tyler,

As far as I know, any type of investment you can hold in an RRSP would also be eligible for TFSA. I haven’t got any experience investing in bonds using my TFSA but I am sure it is possible.

My take on the TFSA is that you should use it for investments which will yield the highest taxable income since the TFSA provides a shelter for that income. I recommend a self-directed TFSA because sheltering the 2% interest on a “high” interest savings account seems like a waste of this great opportunity. I’d look into self-directed 2nd mortgage lending or equities that are likely to yield higher returns as potential investments for your TFSA.

Cheers,
Andrew

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