Investing in your TFSA
We all know that the TFSA (Tax free savings account) can be used to shelter money from the taxman. Even the dividends you receive and the growth of your investments in the TFSA is tax sheltered. Every year there is a cap on the amount that you can invest in your TFSA account. For the year 2017 its $5500. This year’s amount remains the same as 2016.
Lets look at the TFSA contribution limit over the years :
|Years||TFSA Annual Limit||Cumulative Total|
|2009 – 2012||$5000||$20000|
|2013 – 2014||$5500||$31000|
|2016 – 2017||$5500||$52000|
There you go. That’s the limit you can invest in your TFSA. So what does the chart mean to you or me?
If you haven’t invested any money in your TFSA till date, you get the full contribution room of $52000 this year. Or if you have started investing recently you can get to know your investment room left and pump in money accordingly.
What are the different types of investments that you can purchase and hold in your TFSA ? Is it only the stocks and mutual funds ? Lets look at this now.
The different investment types you can have in your TFSA are :
1. Stocks (Canadian and US)
2. Mutual Funds
3. ETF’s (Exchange Traded Funds – Index)
5. High Interest Savings account
7. Segregated funds
Lets briefly talk about each of these options below and help you decide which one is for you now and why :
1. Stocks – As we all know individual company stocks are traded every working day apart from holidays on the exchanges TSE (Toronto) and NYSE for the US stocks. You can have two separate accounts for the Canadian and US stocks under your parent TFSA account.
2. Mutual Funds – Mutual funds are portfolio’s managed by a mutual fund company. Every individual mutual fund has an account manager who determines at the end of the day as to what stocks/investments needs to be in the portfolio to increase the mutual fund unit value. Thats more or less about it. To sum it up, mutual funds are group of stocks/investments representing a single unit.
3. ETF’s – Exchange traded funds or ETF’s are index funds traded by companies like BMO or iShares.
These funds are traded on the index and function similar to the mutual funds. ETF’s comprise of collection of stocks. You again have different sectors of ETF’s to chose from based on your interest and risk factor. ETF’s are similar the stocks and can be traded in the open stock exchange market.
4. GIC’s – Talking about the GIC’s, you determine how long you want to stay invested. Say 1 to 5 years. Interest is paid on the number of years you stay invested, the longer the better returns. Ideal for the conservative investor who wants to least expose himself to market risks or retirees.
5. High Interest Savings account – What if you plan to buy a car this year or renovate your home which you have long planned for? High Interest savings account is the answer for you because you tend to get higher interest rates than the normal savings account and your money is liquid. Meaning you can take out your cash when you need.
6. Bonds – Bonds are very similar to mutual funds. The only difference between mutual funds and bonds is that bonds are traded in the open market and the price fluctuates daily whereas the GIC’s are closed(locked) units for the term of your choice. In bonds you get back principal + interest. There are short term and long term bonds (up to 20 years).
7. Segregated Funds – Segregated funds are very similar to mutual funds except that they are offered by insurance companies. Since segregated funds are offered by insurance companies they have some unique benefits over mutual funds. They can provide ‘insurance’ guarantees on the capital at death or maturity and some have reset privileges. The draw back of these are that the management fees are usually on the higher side when compared to mutual funds.
That’s it for now, those were the various investment types that you can opt for in your TFSA. You are free to chose the one which is more likely for your age/risk factor and investment choice (Low vs moderate vs aggressive). At the end of the day it all depends on your individuality.
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