Find the Best TFSA GIC Rates
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When you decide to open a tax-free savings account (TFSA), you have a wide range of account types to choose from, all of which are based on the type of investment product you’d like to purchase (i.e. GICs, mutual funds). Remember that a TFSA is in itself not a product, rather an account that you purchase investment products in.
The products that you purchase should reflect your risk profile and your savings timelines. If you’re saving for a short-term goal, you may just choose a high-interest savings TFSA or GIC TFSA, both of which have low interest rates but guarantee both your principal and a return on your investment through interest. If you’re saving for the long-term, you may also have a mutual fund TFSA with the intention of providing diversification. However, if you’re more of a do-it-yourself type of investor, you may want to consider a self-directed TFSA.
Here’s a description of what self-directed TFSAs are, how they work and how to decide if they’re the right option for you.
A self-directed TFSA is an account arrangement with a financial institution, (usually an investment dealer or broker), in which all the decisions about what to buy are made by the account holder (you), not the bank. This contrasts with a mutual fund TFSA, where you might have a certain degree of choice, but only among specific mutual funds offered by your financial institution. Mutual funds are professionally managed on behalf of unit holders, so the individual does not do most of the work in deciding where to allocate their money. With a self-directed TFSA, you are in complete control of where your money goes. People with self-directed TFSAs commonly purchase shares of companies and ETFs within their discount brokerage account such as BMO InvestorLine, RBC Direct Investing or CIBC Investor’s Edge.
With a self-directed TFSA, Canadians are able to construct a portfolio consisting of a wide variety of investments1, including:
Thinking about opening a TFSA? Let Ratehub.ca help you find the best TFSA GIC term and rate.
Some of the reasons you may want to get a self-directed TFSA include:
Of course, there are also noteable risks associated with having and maintaining this type of TFSA:
Neither of these is meant to suggest that you should avoid going the self-directed route; you just need to understand what you’re getting yourself into. If you are going to manage your own portfolio, you should probably spend a reasonable amount of time following your investments, to see how they’re doing and whether you might want to change course. Remember, consistently beating the market is hard if not impossible to do!
You may already have a non-registered brokerage account that holds securities such as stocks or bonds. If so, you can transfer these investments into your new self-directed TFSA so they can begin enjoying tax-free gains. Just be aware that the moment the transfer takes place, the Canada Revenue Agency deems the investment to be sold for tax purposes. As a result, one of two things will happen:
Self-directed TFSAs are not free. It’s not uncommon to be charged an annual “maintenance” fee of $100 by a bank simply to keep an account open, whether or not you made transactions in a given year. On an investment of $5,000, for example, this represents a 2.00% charge, which is quite significant.
There are some other fees associated with self-directed TFSAs. Transferring money from your account to another financial institution can cost $50-$150, depending on whether it’s a full or partial transfer. Closing an account can also cost upwards of $100. Finally, commissions on things like stock trades are extra. Most Canadian discount brokerages2 charge a flat fee of around $9.95 per trade.
If you have sufficient investment knowledge, a self-directed TFSA could be a great investment option for you. Just remember that it’s completely ok (and maybe even advisable) to have a self-directed account but still be very conservative in your investments. For example, just because you’re managing your own portfolio does not mean you have to become a stock picker. You can buy all sorts of safer things like GICs, government bonds and mutual funds, too.
Once you’ve decided to go the self-directed route, you can open an account one of two ways:
During the application process, you’ll need to provide some personal information, as well as tell them how much risk you’re comfortable with, and what level of investment knowledge you have. You will also have to acknowledge that you understand the risks involved, particularly if you plan on using the account for active stock trading or using complex financial instruments like options.