TD Direct Investing TFSA: A Guide

Many banks and financial institutions allow you to open TFSA brokerage accounts where you can purchase stocks, ETFs, mutual funds and other equities and commodities. You can have as many TFSA accounts as you want as long as you don’t exceed the annual contribution limits. That means you can have a TFSA GIC, a TFSA high interest account, and TFSA brokerages at various financial institutions. TFSA is simply a type of an account, not a financial product in itself.

One place to open an online, DIY TFSA brokerage account is through TD Direct Investing, the second largest bank in Canada.

TFSA overview

A TFSA is a flexible tax-sheltered account that allows you to contribute up to $6,000 a year of after-tax dollars. The contribution room is cumulative and revolving. That means you can withdraw funds this year, and next year you can recontribute that same amounts of funds. If you turned 18 by 2009 and have never contributed, then in 2021 you should have a contribution room of $75,500.

Because you contribute to a TFSA with money you’ve already paidm, tax on your duty is considered done. You never have to pay tax on that money again, even when withdrawing. This is probably the biggest difference between a TFSA and an RRSP. With an RRSP your contribution money is deducted from your income, and tax is deferred until withdrawal.

A TFSA is therefore an amazing opportunity for younger tax payers (millennials and members of Gen Z) who have low marginal tax rates now and expect to pay higher taxes in the future.

Like an RRSP, however, any money inside of a TFSA is able to grow tax free. That means no capital gains and no taxes on dividends or interest.

What is TD Direct Investing?

TD Direct Investing is an online do-it-yourself brokerage that charges $9.99 per trade or $7 if you’re an active trader. There is no difference between trading in a cash account and TFSA account—the process of buying and selling stocks is exactly the same.

The application process is online, and you don’t have to be an existing TD customer (although the application process is more seamless if you are).

It offers different platforms depending on your level of expertise and how often you trade. Most customers use the basic Web Broker platform, which is available on mobile, too. You also get a full suite of free investor education, with webinars, introductory classes and a learning centre full of articles.

Mutual funds are free to trade (probably because TD sells mutual funds so it’s in their interest to have you buy their product.) Bonds, treasury bills and other fixed income products are also free to buy. Options are $1.25. Gold is $30USD /+$1/oz and silver is $30USD+$0.10/oz.

Household accounts with total assets of less than $15,000 are subject to a $25 maintenance fee every quarter, but there are a lot of ways to avoid paying this (like if you make at least three trades a quarter or enroll in a pre-authorized contribution plan totalling at least $100 a month).

If you want human assistance for making a trade, you will be paying a lot. Placing a trade by telephone can cost at least $43.

Other TFSA Options with TD

TD offers other TFSA options besides Direct Investing. If you want lower-risk options than trading on the stock market, or you’re simply looking for a place to park your cash then you can choose to open a TFSA GIC or a TFSA High-Interest Savings Account. The only real benefit to doing so is if you have a large sum and want to save tax on the interest payments. Since interest is at historic lows this is pretty unlikely. In fact, you don’t even pay tax on interest until it exceeds $50 annually.

TD Tax-Free GIC

TD Tax-Free cashable and non-cashable GICs (guaranteed investment certificates) currently offer paltry interest rates—between 0.10%- 1.25%. Considering inflation is around 2% annually you will actually lose purchasing power by investing in these products.

You may be able to get a slightly higher return with market-linked GICs – up to 5% for holding it for three years or 12% for holding it for five years. Market-linked GICs ensure your principal but tie returns to the stock market. It’s a good option if you want something safe with the potential for higher earnings. You can choose the sector of the stock market you want it linked too, such as Canadian utilities, Canadian banks or the top 500 companies in the United States.

TD Tax-Free high interest savings account

If you’re simply looking for a place to stash your money, then it makes more sense to open a high-interest savings account instead of keeping your funds locked up in a GIC. The interest rate is currently 0.05% on all balances. There is no monthly account fee.

Fees & Pricing

The pricing structure, and full schedule of fees for TD Direct Investing is similar to the other five big banks (except for CIBC, which charges a more affordable $6.95 per trade). However, it’s much more expensive than independent DIY brokerages like Questrade ($5 a trade), Interactive Broker (usually less than $1 a trade), and Wealthsimple (free trades).

If you’re looking to save money it’s probably best to go with an independent DIY brokerage as they’re likely going to be cheaper. Although the fees and commissions seem small, they can add up over time. For example, if you purchase $5,000 of stock, and you’re paying $20 to buy and sell, then the fee is already $0.4 percent of your investment. If you can hope to get 6% gains annually, and inflation is at 2% then your real rate of return just dropped to 3.6%. With no trading fees your real rate of return would be 4%. Not a huge difference but over 30 to 40 years of investing, it can add up to a significant chunk of your returns.

Since your ultimate goal with opening an investment TFSA account is to build wealth then it makes sense to go with a brokerage that minimizes or eliminates fees.