TFSAs are a spectacularly useful financial tool, but you can buy the wrong kind.
This point must be raised in light of a reader's recent note. This guy is in his mid-40s and recently woke to the benefits of the tax-free savings account. "I can't believe I have been missing out on this tax free growth opportunity," he said in an e-mail.
His plan: Set up a TFSA so he can trade penny stocks. "I know, there are lots of reasons not to do this, but I have earned enough wiggle room to play with a few thousand in this way," he wrote. Now for the hitch. He went to his bank to get a TFSA and ended up with one of those in-branch accounts that can only hold mutual funds and GICs.
This sort of a TFSA is fine if you want to get an account going on a quick and dirty basis.
Suggestion: Use the bank's Canadian dividend fund as a core investment for this sort of TFSAs. Banks are generally pretty good at running this sort of fund. But if you want the freedom to invest individual stocks, exchange-traded funds, bonds, GICs and mutual funds as well, then avoid the bank branch and instead set up a TFSA at an online brokerage firm.
It's worth noting one more TFSA option, although it won't be of interest to anyone keen to trade penny stocks. You can also have a high interest savings account TFSA earning as much as 1.95 per cent (at Alterna Bank). Some investors scoff at this kind of a TFSA, but it can make good sense as a place for your emergency fund or house down payment fund.
If you want to change the TFSA you have, you'll need to set up a new account and initiate an account transfer. There may be a transfer-out fee, so brace yourself. This type of fee can be as much as $135 at an online brokerage firm.