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How to Open a Self Directed TFSA

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This article aims to answer the frequently asked question from new self-directed investors:

How to open a self-directed TFSA?

Here’s the point, whether we like it or not, there will come a time in our lives where we are no longer as savvy, motivated, and physically able to endure the wear and tear of active work. Sadly, most Canadians aren’t saving enough for their future but the good news is, you belong to the few savvy ones. You would like a future where you no longer have to actively work for a living because you need to, but because you want to. 

Yes, retirement is optional but you need to have the resources to do so should you decide it’s time to hang up the gloves (or the apron).

47% of Canadians can’t comfortably retire at age 65 from their own money and without financial assistance.

Well, maybe you’re just saving for a planned expense, like a trip, or a major life event but for all intents and purposes, opening a TFSA account can lead to a higher wealth than without one.

Generally, there are two options you can consider when opening up a TFSA, one is through an independent broker, and the other, through a financial institution, like banks and credit unions.

Self-directed TFSA is a different breed, this is aimed at those who would like to take matters into their own hands, manage their own funds, and save on management fees on the process.

What is a TFSA?

TFSA is Tax-Free Savings Account, which was introduced in 2008 to encourage Canadians to save up and invest toward their future. Specifically, this was launched for Canadians who aren’t fans of RRSP, or the Registered Retirement Savings Plan.

TFSA is a tax-shelter, unlike RRSP, which is a tax-deferral program, you can withdraw your funds, and the corresponding compounded growth, tax-free. So in essence, TFSA allows you to invest your after-taxed dollars in a tax shelter account, take advantage of tax-free compounded growth, and don’t pay taxes at withdrawal. Yes, tax-free withdrawal!

Keep in mind, however, that I did mention, you’re contributing post-tax dollars. This means that no matter how much you contribute to your TFSA account(s), your tax-owing from your active income for the year remains the same. No tax refunds will ever be issued just because you made your TFSA contribution. 

TFSA is designed for Canadians who don’t mind paying their income taxes in full on the year their income is earned so as not to deal with further tax burdens when withdrawing their investments.

RRSP on the other hand incentivizes Canadians, with a lower tax rate when they contribute into the account. So, say, for example, you’re making $75,000.00 a year in net taxable income, and you contributed $15,000.00, you’re only paying taxes on the $60,000.00 you’ve earned for that year. Whatever taxes collected on the $15,000.00 that you’ve contributed are then returned to you. Your money then grows, tax-free inside your RRSP account. Remember, the $15,000.00 you’ve contributed is pre-taxed, it grows compounded over time, again, without being taxed, so when it’s time for you to withdraw your capital, and its compounded growth, the CRA will tax you for both the capital and the growth, if you’re account were an RRSP. This is mainly because whatever you’ve invested in “pre-taxed dollars”, meaning your capital hasn’t been taxed yet.

In a TFSA, you’re investing dollars you’ve already paid taxes on. It can grow compounded over time, without being taxed on the growth, and you can legally withdraw both your capital and the earned growth without ever paying tax on both. This is because whatever you’ve invested into the account is earned income that’s already been taxed by the CRA.

How Do I Open A Self-Directed TFSA?

A self-directed TFSA is a Tax-Free Savings Account where the investor has full control over where and how his or her money is invested. If you’re investment savvy and want to take full control of your Tax-Free Savings Account, a self-directed tax-free savings account is right for you.

Self-directed TFSA isn’t usually offered by banks and independent brokers like us. It’s an account for those who know their way around the investment world and don’t like the idea of paying someone else to manage their investment for them. Self-directed investment is DIY (do it yourself) investing.

When investing in mutual funds or segregated funds, you have a bit of control but not as much as with a self-directed account but as you may know, there are pros and cons for both.

If you invest through institutional investment platforms, you need not learn the ins and outs of picking the right stocks, bonds, or portfolios. Your advisor can help you choose managed and non-managed funds and portfolios that match your investor profile. With a self-directed TFSA, you can pick individual stocks, bonds, or ETFs, which gives you full control but if you’re not investment-savvy, it may lead to losses than gains.

Of course, investing isn’t rocket science, it doesn’t pertain to trading either. A lot of Canadians looking to open self-directed TFSAs plan to day-trade inside their TFSAs rather than investing for the long term. Investing is about buying assets that compound in value over time, and while the prospects of squeezing more income in the buying and selling of stocks are tempting, most people get burned (financially) this way than actually getting wealthier.

Opening a self-directed TFSA is simple, and quite straightforward. All you have to do is visit an online brokerage website, like QuesTrade,  and sign up for an account. Once your account is approved, simply select TFSA as your account type, and you’re off to the races.

Steps to Opening a Self-Directed TFSA

  1. Click here (Opens Questrade in another tab)
  2. Click on the “Open an Account” tab on the top right portion of the page (see below:

    open a self-directed tfsa
  3. Click “+Add” under “Individual Tax-Free Savings Account (TFSA)

    open a self-directed tfsa step 2
  4. Tick to agree to their terms, then click “Apply”.

    open a self-directed tfsa - click open now
  5. Click “Continue” on the next page and follow along with the prompts to build your profile and set up the self-directed account.

    open a self-directed tfsa -create profile

After your account is set up, you can transfer funds to your self-directed TFSA through online banking or wire transfer.

Build Wealth through TFSA

Most online brokerages offer their investors the opportunity to either make long-term investments or day-trade in their platform. As you may have guessed, I’d recommend that you look at investing for the long term, instead of trying to guess your way up and down the market, pick 2 to 4 bonds ETF portfolios ( combination of stock and bonds indexes) ideally, ones that match your risk profile and contribute between 10% – 25% of your gross income on a bi-weekly, monthly, or annual basis. People in the FIRE (financial independence, retire early) movement save at least 50% of their gross income so they can speed up their retirement. Of course, contributing more is always possible with a self-directed TFSA, you just have to be aware of your TFSA room and the program’s annual limit. 

Building wealth, wherever you choose to build your grow your funds isn’t about timing the market, but about “time in the market“. So if you’re young, and just starting out, maybe in your early 20s, start as soon as possible by deciding on your retirement saving ratio, automate your contribution, and forget about it. If you’re unsure, book an appointment here, and we can help you get set up with a segregated fund portfolio that best matches your risk profile. The longer you are in the market, the longer your funds compound, hence, the bigger wealth you can build for the long term.

For example, say you started investing in your self-directed TFSA at 24-years old, making $14.25 per hour. If you commit to investing 10% of your gross monthly income, at an indexation rate of 2.25% (annual salary increase benchmark), you will have $500,815.40 of your own money built up by age 65 (see image below).

self-directed tfsa canada

Now, you might be thinking, well that’s not a lot of money considering that I would have saved up for 41 years. If you want more, you know that you need to save more, right? At the phase above, you’re only putting away 10% of your income. What if you do exactly the same thing, and saved up on a biweekly basis? This brings up your saving rate to at least 20%, so technically, you would have built up the same amount of wealth in half the time or double the amount by the time you’re 65, as illustrated below.

self directed tfsa canada projection 2

Also, notice that these projections were based on an expected average compounded return of 5%. You can get a higher return but for realistic projection’s sake, we’ll just keep it at 5%. Should you get a higher average return, that’s actually icing on the cake, let’s make sure that you get your cake first :).

Following the second illustration above, your capital contributed would only amount to $392,560.00, your compounded gain is $691,353.00. This is the power of the eighth wonder of the world working in your favor.

self-directed tfsa growth projection

TFSA Annual Limit

As of this writing (2021), the annual TFSA limit is $6,000.00.

This means that you can put as much as $6,000.00 a year on your TFSA account(s) starting 2021.

If you’re born in Canada or moved here prior to age 18, your TFSA room started accumulating when you turned 18, or in 2008 if you’re more than 18 when it was first introduced.

If you’ve migrated here as an adult, your TFSA room started accumulating the year you’ve arrived in Canada or after 2008. In the prior years, the annual TFSA limits were between $5,000.00, and $5,500.00, this means that if you’ve lived in Canada for a while now, you would have more than enough TFSA limit. You can check yours by checking your latest Notice of Assessment or by opening a personal MyCRA account here.

Like RRSP, your TFSA room tends to increase over time if you’re not maximizing your annual contribution room, and since you’ve searched for information on how to open a self-directed TFSA, I would assume that you already know the advantages of building wealth inside a tax shelter such as TFSA so I wouldn’t go into details but just in case, it’s important to know that tax shelter programs like TFSAs allow you to build wealth over time without getting taxed on growth, plus you can withdraw 100% of your wealth, later on, tax-free.

Automate Your TFSA Contribution

Whether you’re contributing to a self-directed TFSA or portfolio-based TFSA (like segregated funds), it’s important to automate your contribution if you want to build wealth on autopilot over time.

If you appreciate the value of hard work, it’s equally important to have your money work as hard or harder than you do. Automating your TFSA contribution makes it a point that you’re putting away money into your TFSA on a regular basis. I suggest you contribute on a bi-weekly basis if you’re just starting out and contributing a small percentage of your earned income. 

Automating your wealth building is a slow, yet proven way of building your future. If all you do is work at a job for the rest of your working life, yet you managed to put away a good chunk of your income on a regular basis, you would be far wealthier than when you did not automate wealth accumulation.

Far too many Canadians open self-directed TFSAs, put in their initial contribution, then fail to follow through. If you’re opening a segregated or mutual fund TFSA, your advisor would have set up a bi-weekly or monthly preauthorized contribution on your behalf (with your permission, of course) but this doesn’t automatically get set up with self-directed accounts.

You have to set up a pre-authorized contribution yourself if you’re opening a self-directed TFSA. It is also important to note that whatever contribution you make doesn’t get invested into a fund right away, it goes into the cash account of your TFSA.

As a self-directed investor, it’s your job to make it a point that your funds aren’t just sitting on cash because “cash” doesn’t get invested into the markets, and as such, it won’t help you achieve your wealth-building goals.

Final Thoughts

Whether you’re opening a self-directed TFSA or through institutional investments like Mutual funds or Segregated funds, it’s best to invest for the long term to take the most advantage of compounded growth, instead of trying to time the ups and downs of the market through day trading. 

Far too many people lost money by trading than by investing for the long term. When investing, it’s a good idea to assess ones’ risk profile, if one were to open a TFSA account with an advisor, the first step of the process the investor profile assessment to make it a point that whatever portfolio you invest in is in accordance with your risk profile.

The advantage of a self-directed TFSA is that you pay lower fees, usually, you’re charged trading fees each time you execute a trade order (buy/sell), with institutional investors, you get charged management fees since you have professional money managers who manage your funds for you.

If you don’t like the idea of paying for management fees, then self-management or DIY investing may be for you but it’s advisable to first research the market, know your risk profile, and practice disciplined investing. 

A lot of people who first thought they were investing end up betting on the ups and downs. Again, trading isn’t investing. Educated investors don’t usually trade, they’re in for the long term.

I hope that you’ve found value in this article if you haven’t done so, you can open a self-directed TFSA here. If, on the other hand, you would like to open a segregated fund TFSA (where you get guarantees, reset, creditor protection, and probate bypass benefits), you can book an appointment here.



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