If you’ve been wondering, “What is the best investment to put in a TFSA?” you’re not alone. Many Canadians find themselves scratching their heads when it comes to making the most out of their Tax-Free Savings Account (TFSA).

Whether you’re saving for a down payment, planning for retirement, or building an emergency fund, the TFSA is a versatile tool that can help you achieve your financial goals—if you know how to use it wisely. Let’s explore the best investments for a TFSA and how to choose what’s right for you.

Understanding the TFSA Basics

Before we talk about the best investments, let’s quickly recap what a TFSA is. The Tax-Free Savings Account is a registered account that allows your investments to grow tax-free. While you don’t get a tax deduction for contributions like with an RRSP, the big advantage is that any income or gains earned inside the account—whether from interest, dividends, or capital gains—are not taxed, even when you withdraw them.

For 2025, the TFSA contribution limit is $7,000, and if you’ve never contributed before, you could have as much as $102,000 in room (depending on your age and eligibility).

Knowing this, let’s explore your options for the best investments.

Options to invest in TFSA

Due to the TFSA’s tax-free nature, you can invest in virtually anything, depending on your goals, time horizon, and risk tolerance. Here’s a closer look at the options:

Cash and High-Interest Savings Accounts (HISAs)

Why Consider It:

• Ideal for short-term goals like a vacation or an emergency fund.
• Offers safety and liquidity, so you can access your money easily when needed.

Example:
You’re building a $10,000 emergency fund. Parking it in a TFSA HISA with a 4% annual interest rate will earn you $400 in tax-free interest each year.

Considerations:
While safe, this option lacks significant growth potential. If your timeline extends beyond a few years, explore other investments.

Guaranteed Investment Certificates (GICs)

Why Consider It:

• Provides guaranteed returns and is ideal for conservative investors or those protecting their principal.

Example:
Investing $10,000 in a 3-year GIC offering 5% annual interest would earn $1,576.25 tax-free over the term.

Considerations:
GICs lock in your money, which isn’t ideal if you need quick access. However, cashable GICs offer flexibility, albeit with lower rates.

Exchange-Traded Funds (ETFs)

Why Consider It:

• ETFs offer diversification, low fees, and growth potential for medium- to long-term goals.

Example:
Investing $10,000 in a broad-market ETF like Vanguard Total Stock Market ETF (VTI) could grow to $14,025.5 in five years, assuming a 7% annual growth rate.

Considerations:
ETFs are subject to market volatility, so they’re better suited for longer time horizons. Be sure to select low-cost ETFs with competitive management expense ratios (MERs).

Dividend Stocks

Why Consider It:

• Provides steady income along with capital appreciation potential. Tax-free dividends amplify the benefit.

Example:
Investing $20,000 in Royal Bank of Canada (RY) shares yielding 4% could generate $800 annually in tax-free dividends. Over 10 years, assuming a modest 5% annual growth rate, your investment could grow significantly.

Considerations:
Dividend stocks carry more risk than ETFs or GICs. Diversification and research are key.

Growth Stocks

Why Consider It:

• Higher potential for capital gains, ideal for investors with a high-risk tolerance and long-term goals.

Example:
A $10,000 investment in Shopify (SHOP), growing 20% annually for five years, could reach $24,883.2 tax-free.

Considerations:
Growth stocks are volatile and may not maintain consistent growth rates. Stay informed on company performance and industry trends.

REITs (Real Estate Investment Trusts)

Why Consider It:

• Provides exposure to real estate without being a landlord. REITs often pay high dividends, making them attractive for TFSA investors.

Example:
A $10,000 investment in RioCan (REI.UN) with a 6% yield would generate $600 in tax-free income annually.

Considerations:
REITs are sensitive to economic conditions and interest rate changes. Diversification within this asset class is essential.

Bonds and Bond ETFs

Why Consider It:

• A stable investment that balances risk in your portfolio while offering tax-free interest.

Example:
A $10,000 investment in BMO Aggregate Bond Index ETF (ZAG), yielding 3%, would earn $300 in annual interest.

Considerations:
Bonds typically offer lower returns and may be negatively affected by rising interest rates.

Ranking Investments Based on Risk Appetite

When deciding what is the best investment to put in a TFSA, your risk tolerance plays a crucial role. Here’s how various investment options rank from the most conservative to the most aggressive:

Investment Type	Risk Level	Expected Return	Best For
Cash and High-Interest Savings Accounts (HISAs)	Very Low	1-4% annually	Conservative investors or those with short-term goals
Guaranteed Investment Certificates (GICs)	Low	3-5% annually	Medium-term goals where capital protection is a priority
Bond ETFs	Low to Moderate	2-4% annually	Conservative to moderate investors aiming for steady income
Dividend Stocks	Moderate	3-6% annually (dividends) + potential capital gains	Moderate risk-tolerant investors seeking income and growth
Exchange-Traded Funds (ETFs)	Moderate to High	5-8% annually (depends on the market)	Medium- to long-term investors comfortable with market fluctuations
REITs (Real Estate Investment Trusts)	Moderate to High	5-7% annually (dividends) + potential capital gains	Income-focused investors with moderate risk tolerance
Growth Stocks	High	10%+ annually (potential capital gains)	High-risk tolerance investors with long-term horizons

The Importance of Diversification

When deciding what is the best investment to put in a TFSA, remember that diversification is key. A balanced portfolio might include:

• Cash for short-term needs
• ETFs or stocks for growth
• GICs or bonds for stability

For example, you could split a $60,000 TFSA like this:

• $10,000 in a high-interest savings account
• $20,000 in ETFs (e.g., a mix of Canadian and U.S. markets)
• $16,000 in dividend stocks for income
• $14,000 in a GIC

This approach ensures you’re not overly exposed to any single asset class. By balancing safety, growth, and income, you can tailor your TFSA to suit your financial goals and risk tolerance.

How to Match Investments with Your Goals

To make the most of your TFSA, align your investments with your financial objectives. Here are some common goals and suitable investment types:

1. Short-Term Goals (1-3 years):
   • Focus on cash, HISAs, or short-term GICs.
   • Prioritize liquidity and safety over returns.
2. Medium-Term Goals (3-10 years):
   • Consider a mix of ETFs, dividend stocks, and bond ETFs.
   • Balance growth potential with moderate risk.
3. Long-Term Goals (10+ years):
   • Focus on growth stocks, ETFs, and REITs.
   • Take advantage of compounding and higher-risk, higher-reward opportunities.

By matching your investments to your timeline and risk tolerance, you can optimize your TFSA strategy.

Common Mistakes to Avoid

1. Holding U.S. Dividend Stocks in a TFSA: U.S. stocks can offer strong growth potential, but their dividends are subject to a 15% withholding tax in a TFSA. If earning dividends is your focus, Canadian stocks might be a better option. Alternatively, hold U.S. stocks in an RRSP to avoid the withholding tax entirely.
2. Ignoring Risk Tolerance: Don’t chase high returns if you can’t stomach volatility. Align your investments with your goals and risk appetite.
3. Not Maximizing Contributions: Skipping contributions means losing out on valuable opportunities for tax-free growth. Even small investments in a TFSA can compound significantly over time.
4. Overlooking Fees: High fees can eat into your returns. Opt for low-cost ETFs or stocks to minimize expenses.
5. Neglecting Diversification: Putting all your money into one investment type increases risk. A diversified portfolio spreads risk and improves stability.
6. Overcontributing to your TFSA: 2025 TFSA contribution limit is $7,000. If you exceed your contribution limit, the Canada Revenue Agency (CRA) charges a 1% monthly penalty on the excess amount until it’s withdrawn.

Related content:

• 10 Common TFSA Mistakes to Avoid
• Buying US Stocks in TFSA: a Smart Move or a Tax Risk?

Final Thoughts

So, what’s the best investment for your TFSA? The answer depends on your financial goals, timeline, and risk tolerance. For short-term needs, safe options like cash and GICs are ideal. If you’re focused on long-term growth, ETFs and growth stocks provide excellent potential. Income-focused investors might prefer dividend stocks or REITs for steady cash flow.

One of the greatest advantages of a TFSA is its flexibility. You don’t have to limit yourself to a single investment type. By combining secure options like HISAs with growth-focused assets like ETFs, you can create a diversified portfolio that aligns with both short- and long-term objectives.

With the right mix of investments, you can fully leverage the TFSA’s potential to grow your wealth while enjoying tax-free gains. It’s a powerful tool to help you achieve your financial goals on your own terms.