Now that you’re well versed in the basics of the tax free savings account (TFSA), it's time to ponder the best way to invest your money. Remember: the TFSA is a somewhat misnamed government registered plan. Investing your money via TFSA protects it from taxes when you earn interest and withdraw the money. But you don’t need to simply let it lie in a bank-style account.
You can invest the money any way you like — depending on what you want your investment to do.
Most major lenders in Canada offer a TFSA GIC program. A GIC (Guaranteed Interest Certificate) is a secure way to grow your money. You buy in at a set interest rate and your rate of return is guaranteed. The upside is you can’t lose your money, and as you know how much of a percentage in interest is offered by your GIC, it's possible to predict right now how much your investment will be worth in the future. Since TFSAs are generally used for longer term savings, GICs can be a good fit as you tend to earn an higher interest rate the longer you lock in.
With national interest rates so low, the rate of return on a GIC isn't great. Rates vary but generally speaking you can earn just two per cent if you lock in for around five years. As well, most GICs have a set term and you can’t get your money out until that term has passed. If you need your money for an emergency, you might not be able to access it. While you can invest in a more flexible GIC, the trade off is an even lower interest rate.
Many lenders offer various GIC products that might help you maximize your investment. Some offer escalating interest rates, which are ideal if you want to lock in for the long term. Many offer liquidity on the anniversary of the GIC, so you can put a portion of your emergency savings in this product and access it periodically. As well, lenders are offering market-linked GICs that offer a variable interest rate but protect your principal so you can’t lose money. These might be an ideal compromise for people who want to play safe but realize potentially better returns in this low-interest environment.
To determine if the GIC route is right for you, and which product of the many available is best for your investment, be sure to talk to a financial planner or your lender. Keep in mind that interest rates are a record lows and will rise eventually.
Seeking a compromise between low returns and the insecurity of the world’s financial markets is the trick when looking at GICs for your TFSAs right now.