Toronto Star

Save cash smarter

The best way to use your tax-free savings account depends on your long- or short-term financial goals

- ROBB ENGEN

The tax-free savings account (TFSA) has been around for a decade now, but many Canadians still underutili­ze — or misunderst­and — what makes the TFSA such a fantastic savings tool. The problem lies in the name: tax-free

savings account, which implies a place to park our cash.

It doesn’t have to be this way. In fact, one of the best ways to use your TFSA is to invest for the long term.

While I like to think long-term investing is the preferred strategy for your TFSA, some of us just aren’t wired that way and would rather keep their money ultra-safe and accessible.

If your savings goals are for the short to medium term, such as building an emergency fund or saving for a car or down payment on a house, a safe investment is exactly what you need. You’re likely to find rates in the 2 to 3 per cent range for high-interest TFSAs. Many banks offer short-term promotiona­l offers to entice new customers, so do your research and find the best rates online.

High-interest savings accounts are ideal for emergency funds or shortterm goals. One pitfall to avoid is raiding your TFSA cash stash too often because you’ll quickly lose track of your

available contributi­on room.

A guaranteed investment certificat­e (GIC) might be a better option for a fixed-term savings goal, such as buying a new house in three years. GICs lock your money away for anywhere from 90 days to five years. Because the money is locked in, you should get a better interest rate. But rates do fluctuate, so you’ll have to do your research.

More sophistica­ted options for medium- to long-term goals include holding mutual funds inside your TFSA. But be careful: Many mutual funds tend to have high management expense ratios (MERs), charging 2 per cent or more of your assets each year. Look for a mutual fund, or a portfolio of funds, that charges 1 per cent or less. Exchange-traded funds (ETFs) and individual stocks are also considered qualified TFSA investment­s, as long as they are listed on a designated stock exchange.

Here are four options for those considerin­g investment­s for the long term inside their TFSA:

Tangerine mutual funds. Tangerine offers a suite of five mutual funds ranging from conservati­ve to aggressive. Each fund comes with an MER of 1.07 per cent. Each fund will automatica­lly rebalance, so there’s no concern over managing your own portfolio — just set it and forget it.

TD e-Series funds. TD’s popular e-Series funds can be purchased in a regular TFSA account with TD, or through a self-directed TFSA account at TD Direct Investing. The funds come in a variety of flavours, but most investors would do well with a portfolio consisting of Canadian equities, U.S. equities, internatio­nal equities and Canadian bonds. A portfolio of these four funds can be built with an MER of about 0.42 per cent. Investors are on their own to purchase funds and rebalance their portfolio.

Robo-adviser. A robo-adviser is a great way for investors to set up a sophistica­ted investment portfolio without the hassle of doing it on their own, or at the cost a full-service adviser. Expect to pay about 0.50 per cent in management fees, plus another 0.20 per cent or so for the investment­s in your account.

Invest in ETFs through a discount brokerage. Investors can open a self-directed TFSA account at their bank’s discount brokerage arm or at an independen­t online discount brokerage. From there, the simplest way to invest is through one of the new asset allocation ETFs or one-ticket balanced ETFs offered by Vanguard (VCNS, VBAL, VGRO, VEQT), iShare s (XBAL, XGRO) or BMO (ZCON, ZBAL, ZGRO). With just one ETF, you can get a low-cost, globally diversifie­d portfolio of equities and fixed income. The MER on these funds ranges from 0.18 to 0.25 per cent.

The best way to use your TFSA depends on your financial goals. For conservati­ve savers or those looking to set aside cash for a short-term money goal, the best use is a simple, high-interest savings account. If your goals are further out, say five years or more, you can think about investing in mutual funds or ETFs. How should you invest? Again, that depends on your individual situation.

Will you contribute to your TFSA in small, more frequent amounts? If so, you might be better suited for a portfolio of mutual funds, or using a roboadvise­r where there are no commission­s to buy and sell.

An investor with a larger TFSA who contribute­s maybe once or a few times per year might find ETFs more compelling due to the lower costs and ability to self-direct their portfolio.

 ?? LEV DOLGACHOV DREAMSTIME ?? Avoid raiding your TFSA too often — you’ll quickly lose track of your available contributi­on room, Robb Engen writes.
LEV DOLGACHOV DREAMSTIME Avoid raiding your TFSA too often — you’ll quickly lose track of your available contributi­on room, Robb Engen writes.

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