When determining which tax-free savings account (TFSA) to choose, there are a few things to consider. The first being whether the account will be used primarily for saving or for investing. Once you know this, choosing the right account for you will be much simpler. Some other things to consider when choosing a TFSA are:
Your risk tolerance is your ability to deal with the variability and potential loss of your investments. Risk tolerance is determined by several factors including income, financial goals, personal wealth, and age. It is important to purchase investments which align with your risk tolerance. There are three levels of risk tolerance which are:
- Conservative investing – This type of investing has little risk and smaller returns
- Moderate investing – This type of investing has medium risk and returns
- Aggressive investing – This is high risk investing which has the potential for large returns
Your risk capacity is the approach to investing you will take to meet your goals. Risk capacity can vary from no risk to high risk. Usually, your risk capacity and risk tolerance will complement one another.
Consider which investments you would like to have in your TFSA and their risk, be sure to choose investments which follow your risk tolerance and risk capacity.
- Guaranteed Investment Certificate (GICs) – are a low-risk investment which offer guaranteed returns
- Stocks – are a higher risk investment with the potential of a much higher return
Many TFSAs have different interest rates, minimum balances, or withdrawal fees depending on which bank offers the account. It is wise to compare several accounts from different banks to find which one is right for you.
A tax-free savings account (TFSA) can be an excellent investment tool when used correctly. Taking the time to select the right TFSA for you can help you maximize your investment gains. When choosing which Tax Free Savings Account to use, we recommend you talk to a professional financial planner to determine what would be best for your financial goals. Click the links to find out more about what a TFSA is and how to open one.