What type of investments should be in a TFSA, given its tax-free growth and withdrawal benefits?
A questoin that I deal with almost every day.  Like most investments it comes down to.....What is the purpose for this money?  If it is truly a rainy day savings account that you may need in the short term, then fixed income investments like savings accounts, GIC's, Bonds, Bond funds and Fixed Income ETF's are ideal as they are taxed very inefficiently outside of any registered plan (therefore tax free in here).  However if you have a plan in place that has all your short term needs covered elsewhere, I believe this is the place that you should be the most aggressive in your overall portfolio.  If that mining stock goes up by 1000% wouldn't it be nice to put all of that gain in your pocket? "I think ""optimal"" is a term that needs to be better qualified - what's optimal investment for one person is not necessary optimal for another, as it depends on the investor's time horizon, risk tolerance, and investment knowledge. I would personally put fix-income (or products that generates incomes that CRA considers as ""interest"") products in the TFSA so the gains aren't taxed at all.  I would consider putting preferred shares in this account as well, since dividend incomes are taxed higher than capital gain and preferred shares don't usually change in price unless the company's ability to pay the dividends are in-doubt.  I don't want to put common equities in TFSA as that would take away your ability to leverage past losses to reduce future capital gains. If you are using TFSA as a way to accelerate saving for a near-term purchase, then you definitely want to employ fix-income products as the underlying saving vehicle, since market volatility would be your enemy (unless you are feeling very lucky).   If you are using TFSA as a way to supplement your registered retirement saving account, then you can treat it the same way you would invest in your RRSP."
Rule of thumb: Invest in a tax deferred account only if your marginal tax rate is higher now than it will be in retirement. If you plan on making more taxable income in retirement than you do right now, then you should invest outside a tax deferred account. As far as I read in many articles, all earnings (capital gains and   dividends) from Canadian stocks will be always tax-free. Right?   There's no withholding tax, ie. a $100 dividend means you get $100.  There's no withholding for capital gains in shares for anybody.  You will still have to pay taxes on the amounts, but that's only due at tax time and it could be very minor (or even a refund) for eligible Canadian dividends.  That's because the company has already paid tax on those dividends. In contrast, holding U.S. or any foreign stock that yields dividends   in a TFSA will pay 15% withholding tax and it is not recoverable. Correct, but the 15% is a special rate for regular shares and you need to fill out a W8-BEN.  Your broker will probably make sure you have every few years. But if you hold the same stock in a non-registered account, this 15%   withholding tax can be used as a foreign tax credit? Is this true or   not or what are the considerations? That's true but reduces your Canadian tax payable, it's not refundable, so you have to have some tax to subtract it from. Another consideration is foreign dividends are included 100% in income no mater what the character is.  That means you pay tax at your highest rate always if not held in a tax sheltered account. Canadian dividends that are in a non-registered account will pay   taxes, I presume and I don't know how much, but the amount can be used   also as a tax credit or are unrecoverable? What happens in order to take into account taxes paid by the company is, I read also that if you don't want to pay withholding taxes from foreign > dividends you can hold your stock in a RRSP or RRIF?  You don't have any withholding taxes from US entities to what they consider Canadian retirement accounts.  So TFSAs and RESPs aren't covered. Note that it has to be a US fund like SPY or VTI that trades in the US, and the account has to be RRSP/RRIF.  You can't buy a Canadian listed ETF that holds US stocks and get the same treatment.  This is also only for the US, not foreign like Europe or Asia. Also something like VT (total world) in the US will have withholding taxes from foreign (Europe & Asia mostly) before the money gets to the US.  You can't get that back. Just an honourable mention for the UK, there's no withholding taxes for anybody, and I hear it's on sale. But at some point, if I withdraw the money, who do I need to pay taxes, > U.S. or Canada? Canada. It really depends on your taxable income.  If you are in a higher tax bracket and expect to be in a lower tax bracket in retirement, the RRSP is probably your best bet.  If, however, you are in a low tax bracket now, then it might be best to start with your TFSA. Hope this helps! Can you wait until you retire before needing the money? Will you buy your first house sometime in the future? If yes, then favour an RRSP. Remember that you are rewarded by paying less tax for having the foresight and commitment to defer income taxes until your retirement, when you are presumably earning less income. Are your household expenses higher than 28% of your gross income? 35% of your net income? Does making your mortgage payments stress you? Are interest rates lower than their historical norm and an increase would cause you difficulty? If yes, then favour your mortgage. Do you need this money before your retire? Does your TFSA earn more interest than your mortgage costs your? If yes, then favour a TFSA. Does an alternative investment earn more than your TFSA? Can you handle an uptick in your mortgage interest rate? If yes, then favour the alternative investment and not your RRSP, mortgage or TFSA. In response to your points #1 and #2: In general, yes it is true that capital gains are only subject to half one's marginal rate of income tax.  That doesn't mean 50% of the gain is due as tax... rather, it means that if one's marginal tax rate (tax bracket) on the next $10K would have been, say, 32%, then one is taxed on the gain at 16%.  (The percentages are examples, not factual.) However, because these are employee stock options, the tax treatment is different than for a capital gain!    Details: On the Federal tax return are lines for reporting Security option benefits (Line 101) and Security options deductions (Line 249).  The distinction between a regular capital gain and an employee stock option benefits is important.  In many cases the net effect may be the same as a capital gain, but the income is characterized differently and there are cases where it matters.  Somebody who is about to or has realized employee stock option benefits should seek professional tax advice. In response to your next two points: No, one cannot transfer a capital gain or other investment income into a TFSA immediately after-the-fact in order to receive the tax-free benefits of the TFSA on that income.  Only income and gains earned within a TFSA are free from tax – i.e. The options would have to have been in the TFSA before being exercised.  Once a gain or other investment income has been realized in a non-sheltered account, it is considered taxable.  The horse has already left the barn, so to speak! However, despite the above, there is another strategy available:  One can create an offsetting deduction by contributing some of the realized gain into an RRSP.  The RRSP contribution, assuming room is available, would yield a tax deduction to offset some tax due on the gain.  However, the RRSP only defers income tax; upon withdrawal of funds, ordinary income tax is due (hopefully, at a lower marginal rate in retirement.) There is no minimum amount of time that money or assets have to be inside a TFSA to benefit from the tax-free nature of the account.  However, there are limits on how much money you can move into a TFSA in any given year, and many folks weren't aware of the rules. p.s. Let me add once more that this is a case where I suggest seeking professional tax advice. What asset allocation is right for you (at the most basic the percentage if stocks vs bonds; at the advanced level, percentage of growth vs value, international vs domestic etc) is a function of your age, retirement goals, income stability and employment prospects until retirement.  Roth IRA is orthogonal to this.  Now, once you have your allocation worked out there are tactical tax advantage decisions available: interest income, REIT and MLP dividends are taxed at income and not capital gains rate, so the tactical decision is to put these investments in tax advantage accounts like Roth and 401ks.  Conversely, should you decide to buy and hold growth stocks there are tactical advantages to keeping them in a taxable account: you get tax deferment until the year you choose to sell (barring a takeover), you get the lower lt cap gains rate, and you can employ tax loss harvesting. At the very least I'd look closely at what you could get from the RESP (Registered Education Savings Plan). Depending on your income the government are quite generous with grants and bonds you can get over $11,000 of 'free' money if you qualify for everything CESG - Canada Education Savings Grant  By applying for the CESG, up   to $7,200 can be directly deposited by the Federal Government into   your RESP. The Canada Education Savings Grant section offers   information about eligibility requirements for the grant as well as   how to use it when the beneficiary enrolls at a post-secondary   institution. CLB - Canada Learning Bond CLB is available to children   born after December 31st, 2003 if an RESP has been opened on their   behalf. Browse the Canada Learning Bond section to find out who is   eligible, how to apply, and how much the Government of Canada will   contribute to your RESP. I can recomend the TD e-series funds as a low cost way of getting stock market exposure in your RESP So if I were you... As an example if you earn $40k and you pay in the minimum amount to get all the grants ($500/year, $42/month) assuming zero growth you'll have almost $14k of which $5.4k would have been given to you buy the government, if you can afford to save $200/month you'll get over $11,000 from the government "You ask about ""traditional IRA VS taxable (non-retirement) investment account.""  You already know about tax deductible IRAs, which are similar, mostly, to your 401(k). A Traditional IRA can have a non-deducted component. In a sense, it then functions similar to the fully pre-tax IRA as it grows tax free, but then withdrawals are made and taxes paid on the pro-rated not-yet-taxed money.  It also offers the simple conversion to a Roth IRA. For those who have no current IRA with pre-tax money, a conversion will be tax free, for those with an existing pretax IRA, conversions are prorated for tax due, if the account had say $10,000, and $5,000 was post-tax, any conversion will have half taxed at your marginal rate." "For an RRSP, you do not have to pay taxes on money or investments until you withdraw the money. If you do not reinvest the dividends but instead, take them out as cash, that would be withdrawing the money. For mutual funds, you would normally reinvest the dividends if holding the investment inside an RRSP. For stocks, I believe the dividends would end up sitting in the cash part of your RRSP account (and you'd probably use the money to buy more stocks, though would not be required to do so). Either way, you do not pay tax on this investment income unless you withdraw it from your RRSP. For example, you invest $10,000 inside your RRSP. You get the tax benefit from doing so. You get dividends of $1,000 (hey, it was a good year), and use these to buy more stock. As the money never left your RRSP account, you are considered to have invested only your initial $10,000. If instead, you withdraw the $1,000 in dividends, you are taxed on $1000 income. TFSA are slightly more complicated. You don't get a tax benefit from your initial contribution, but then do not pay tax when you withdraw from the TFSA. Your investment income is still tax-free, and you are (generally) much more limited in how much you can contribute. For example, you invest $10,000 inside your TFSA. You get dividends of $1,000, and use these to buy more stock. Your total contributions to your TFSA remains at $10,000 as the money never left your account. You could instead withdraw the $1000 from your TFSA and would not pay tax on it. In the next calendar year (or later) after the withdrawal, you could ""repay"" the $1000 you took out without suffering an overcontribution penalty. This makes TFSA an excellent place to park emergency funds, as you can withdraw and subsequently replace the investment while continuing to get the tax benefits on your investment income. RRSPs are better for retirement or for the home buyers plan. In general, you should not be withdrawing money from either your TFSA or RRSP, except in emergencies, when retiring, or when purchasing a home. I prefer indexed mutual funds or money market accounts for both my RRSP and TFSA rather than individual stocks, but that's up to you." "A TFSA is a tax free savings account.  It is a type of account where you can buy various investments like stocks, bonds, or funds (mutual, exchange traded, and money market).  There are some other options but it's best to see what your bank or broker will allow. You probably specified the type of investment when you opened the account.  You can look at your statements or maybe online to see what you're invested in.  My guess is some kind of HISA (high interest savings account).  This is kind of the default option for banks. The government created these accounts for a variety of reasons.  The main stated reason was to encourage people to save.   Obviously they also do things to get votes.  There was an outcry after the change to a type of investment called ""investment trusts"".  This could be seen as a consolation prize.  These can be valuable to seniors for many reasons and they tend to vote more often.  There was also an election promise to eliminate capital gains taxes in some fashion. It's not profitable for the government, in fact it supposedly cost the federal government $410 million in 2013.  Banks make money by investing your deposit or by charging fees. You can see what every tax break 'costs' the government in lost revenue here http://www.fin.gc.ca/taxexp-depfisc/2013/taxexp1301-eng.asp#toc7" How would the RRSP know where the money came from? You have two separate financial operations going on: You invest some money, within the limits set by the law, in a Tax Free Savings Account.  Near the end of the year, you take the money, plus interest, out of the account.  As you may guess by the name, you need not report the interest as income. There are no restrictions on the money, except that you can't put it back in the TFSA until the new year.  The money is not segregated, or frozen, or marked with an exploding dye-pack.  It's just money in your regular bank account, or your pocket, or under your mattress. During that year, you also work for a salary.  Some is deducted from your salary to prepay your tax responsibilities, subject to a final calculation . You spend some and save some.  The money you save also goes into your bank account, your pocket, or under your mattress. You can even take some of your money from your chosen repository and put it in a RRSP, which postpones the need to pay tax on the original deposit and on any earnings on the deposit.  The money you take has lost all sense of identity:  it isn't TFSA money or salary, or paper route money, or twelfth birthday money.  It's just money... "First, you don't state where you are and this is a rather global site.  There are people from Canada, US, and many other countries here so ""mutual funds"" that mean one thing to you may be a bit different for someone in a foreign country for one point.  Thanks for stating that point in a tag. Second, mutual funds are merely a type of investment vehicle, there is something to be said for what is in the fund which could be an investment company, trust or a few other possibilities.  Within North America there are money market mutual funds, bond mutual funds, stock mutual funds, mutual funds of other mutual funds and funds that are a combination of any and all of the former choices.  Thus, something like a money market mutual fund would be low risk but quite likely low return as well.  Short-term bond funds would bring up the risk a tick though this depends on how you handle the volatility of the fund's NAV changing.  There is also something to be said for open-end, ETF and closed-end funds that are a few types to consider as well. Third, taxes are something not even mentioned here which could impact which kinds of funds make sense as some funds may invest in instruments with favorable tax-treatment. Aside from funds, I'd look at CDs and Treasuries would be my suggestion.  With a rather short time frame, stocks could be quite dangerous to my mind. I'd only suggest stocks if you are investing for at least 5 years.  In 2 years there is a lot that can happen with stocks where if you look at history there was a record of stocks going down about 1 in every 4 years on average.  Something to consider is what kind of downside would you accept here?  Are you OK if what you save gets cut in half?  This is what can happen with some growth funds in the short-term which is what a 2 year time horizon looks like.  If you do with a stock mutual fund, it would be a gamble to my mind.  Don't forget that if the fund goes down 10% and then comes up 10%, you're still down 1% since the down will take more." It is my understanding that there are no penalties for withdrawals and you can withdraw as much as you want as often as you want, including more than once in the same calendar year.  Of course, the money must be in cash in the TFSA, which may require you to sell something.  That sale may have fees associated with it and possibly penalties for early withdrawal, etc. There is still huge confusion over this, because there are penalties for over-contributions in the calendar year.  You contribution limit is still $5,500/year, regardless of how much you may have withdrawn in that same calendar year. So if you withdraw $10K in 2013, you can still only contribute $5,500 in 2013.  In 2014, you can contribute $5,500, PLUS you can also contribute an additional $10K for the 2013 withdrawal of $10K.  Think of it like 2 separate limits, one for current year, and one a running total of all past withdrawals. "TD e-series index funds are great for regular contributions every paycheck since there is no trading commission.  The personal finance blog ""Canadian Couch Potato"" has great examples of what they call ""model portfolios"" and one consists of entirely TD e-series index funds.  Check it out:  http://canadiancouchpotato.com/model-portfolios-2/ The e-series portfolio that is described in the Model Portfolios (linked above) made returns of just over 10%.  This is very similar to the ETF Model Portolio.   One thing to remember is that these funds have a 30 day no sell time frame, otherwise a 2% fee is applied to the funds you withdraw." Yes, it's a term in economics. It is the economy that affects goods and services, and so the vast majority of the economy.   It contrasts with the paper economy, which is what goes on in the financial sector and speaks more about the virtual value in bonds, financial instruments, and shares.