Home > Money, Finance & Investing > Savings, Mutual Fund or Self-Directed Tax-Free Savings Account? The 3 TFSA Options Compared

Savings, Mutual Fund or Self-Directed Tax-Free Savings Account? The 3 TFSA Options Compared

by Andrew C. MacDonald on September 8, 2010

Many of us only think of our RRSP or TFSA accounts only when tax time rolls around, but setting up the right accounts and considering your strategy before the tax rush is a worthwhile idea. In 2009 the Canadian government introduced the Tax-Free Savings Account (TFSA) which is currently available in 3 general flavours:

1) Savings
2) Mutual fund
3) Self-directed

Aside from creating additional confusion for Canadians about where to park their savings, the TFSA has been a great tool for the financially savvy. I personally prefer real estate investments over stocks, bonds and other paper assets, but enjoy having my Tax-Free Savings Account as a place to accumulate savings between the purchase of one rental property and the next. As I gathered statements for each of my accounts in preparation for another rental property purchase last week, I realized how my TFSA has served me well in saving for some big purchases.

Whether you are saving for your next rental property, a down payment on a place of your own, a new car, or braces for your kids, I wanted to share some basic knowledge that can help everyone make the most of their Tax-Free Savings Account. The best place to start is to understand each of the 3 main types of TFSA accounts that are currently being offered.

1) Savings TFSA

The most basic type of Tax-Free Savings Account, and the type most people are familiar with is the regular savings account. These accounts work just like a savings account at any bank where interest is earned on the balance you keep in the account, but the interest you earn will be tax free. With the record low interest rates seen over the past couple of years, it doesn’t take a genius to make a better return using one of the other options. Plain vanilla savings accounts generally only make sense for your TFSA if you will soon need access to your funds, or wish to remain very conservative. If you can wait on the funds a while but still want to keep your money safe, you can consider purchasing GICs in one of these accounts to boost your interest earnings.

2) Mutual Fund TFSA

If you’re in it for the long-haul, a better option may be the mutual fund TFSA. I am not a fan of mutual funds due to the associated management expenses and fees, so I’d recommend looking for a mutual fund TFSA which allows you to invest in index funds. If you’d like to earn a higher return over the long run without much active management, buying index funds within a mutual fund TFSA may be a great choice.

3) Self-Directed TFSA

Finally, if you want more control over your own investments, a self-directed TFSA is probably what you are looking for. With these accounts you can make your contributions and then invest your savings as you see fit. Most self-directed tax-free savings accounts are offered through discount brokers and have reasonable trading fees. Within these registered accounts you can trade anything but futures and forex. The one thing to watch out for with these accounts is admin and withdrawal fees.

Beware of Fees

When setting up a tax-free savings account of any type, be sure to read the fine print. Be sure to avoid administration, transfer, and trade fees early on in your TFSA’s life since these fees can easily eat up any tax savings in the early years. Most Canadian discount brokerages offer self-directed accounts so be sure to shop around to find the best account for you.

My TFSA Weapon of Choice

I have been using a Questrade Self-Directed TFSA since it was introduced in 2009. The account has no annual fee or inactivity fees, a low balance requirement of $1,000, easy funding through online banking, cheap trades (currently $0.01/share with a $4.95 minimum and $9.95 maximum), and good customer service. In addition, they also offer a $50 Questrade Referral Bonus if you sign up through a referral. Sign up using the banner below and you’ll be credited with $50 in free trades.

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

If you are looking for a great way to make the most of your TFSA, go self-directed. And, if you’re looking for the way to make the most of that, sign up for Questrade, the $50 in free trades is a great way to get yourself started. Minimizing your fees early on will maximize your returns and help you get the most out of your TFSA.

Creative Commons License photo credit: Ksionic

If you enjoyed this post, get free updates by email or RSS.

Leave a Comment

Previous post:

Next post: