Self Directed TFSA: What is it & How It Works

A self-directed TFSA (Tax-Free Savings Account) is a type of TFSA that allows account holders to have complete control over their investment choices by managing their own portfolio rather than having it managed by an institution.

Canadians can choose to invest in a wide variety of assets ranging from Cash, GICs, Equities, Mutual Funds, Bonds etc. to be held within their self directed tax-free savings account (TFSA).

Anyone over 18 with a SIN number is eligible to open a TFSA and can choose to self-direct their choice of investments.

What’s The Difference Between a Self-Directed TFSA and a TFSA

The main difference between a self-directed TFSA and a regular TFSA is that individuals can choose exactly what investments they want to purchase with a self-directed TFSA whereas a traditional TFSA is managed by a third-party institution.

With the explosion of retail investors’ participation in financial markets, investors have gained more experience and are incredibly savvy in adopting different investing methods and vehicles.

A tax-free savings account (TFSA) is one such investment vehicle that has gained widespread adoption with billions of invested assets.

These accounts are often professionally managed, and investors own mutual funds from a range of popular asset managers in their tax-free savings accounts.

Individuals wishing to have more control over the asset allocation process within their TFSA can open self-directed accounts.

These accounts enable them to express their investing views and make discretionary investing decisions.

By choosing to self-manage their TFSA portfolio, investors can potentially benefit from lower fees, higher performance and discretionary asset allocation decisions.

While these benefits are undoubtedly great for more sophisticated investors, a self-directed tax-free savings account exposes individuals to additional risk (market risk, concentration risk etc.).

It puts the entire onus of the portfolio performance squarely on the individual investor.

What Investments Can Be Held in a Self-Directed TFSA?

As highlighted above, the benefits of managing your TFSA lead to lower expenses, potential outperformance and more control over the investment decision-making process.

Investors can allocate their self-directed TFSA funds in a wide range of investible assets to gain these benefits.

Common securities that are owned in self-directed TFSAs include:

Considerations When Looking for the Right TFSA Product

Like any investing decision, while choosing to invest in a TFSA, the individual investor must carefully examine their investment horizon along with the amount of risk exposure they’re willing to take.

Long-term investing with a balanced portfolio approach can support most investment objectives and goals.

The beauty of investing using a tax-free savings account is that the investor can make it as hands-on or as passive as they want.

This decision often affects the fees and expenses paid, risk exposure and overall returns generated.

Overall, these are the key considerations while looking for the right TFSA product.

1. Fees

A self-directed TFSA eliminates most of the costs associated with a managed product.

Investors can often replicate market returns without taking additional risk by investing in low-cost index funds.

However, most financial institutions have products designed to manage their portfolios if the individual has limited investing experience and wants a turnkey solution.

2.  Investing Goals and Objectives

Before committing to any investment, an investor needs to understand why they are investing and for how long they intend to tie up their funds.

The TFSA is a highly flexible investing vehicle in terms of limited restrictions with the assets you can invest in and the tax liability created while disposing of assets.

Investors can deposit funds in a high-interest tax-free savings account or invest in high-growth technology stocks for their retirement using their TFSA if they want.

This flexibility allows individuals a wide range of portfolio construction options to ensure they can leverage their tax-free investment vehicle.

3. Management

Managing investments can be difficult.

Unless an individual investor is confident in their investment analysis decisions and discretionary calls, they can benefit from professional management of their TFSA and may enjoy investment returns without constantly monitoring market events and economic news.

Like any decision, this might lead to marginally higher fees and expenses, which may dampen long-term investing returns, but help the individual to focus on other areas and be hands-off in managing their TFSA.

How To Open a Self-Directed TFSA

As highlighted above, if an individual investor possesses sufficient knowledge of investing principles and wants to be in the driver’s seat of their investment portfolio, they can enjoy the benefits of a self-directed TFSA.

They can open an account with any financial institution such as a big 5 bank or an online broker such as Wealthsimple.

The individual would need to provide some personal identification information, link their bank accounts, and sign off on disclosure forms associated with their financial institution.

Within 3-5 business days, the account should be set up, and the individual can fund the account to begin investing in their TFSA.

Wealthsimple Trade Self-Directed TFSA on Computer

Frequently Asked Questions

  • Can I have a self-directed TFSA?
  • Can I invest my TFSA in stocks?
Sid Mohapatra

Sid Mohapatra is an energy trader based out of Toronto working in power and natural gas trading. Prior to working in commodities, Sid worked at a top Canadian bank’s fixed income and derivatives business. He possesses strong fundamentals in asset allocation, global macro thematic investing and physical commodities.

As a graduate of McMaster University, Sid specialized in Finance and has taught numerous sessions on Investing, Financial Securities and Trading courses. He led and managed the Horizon’s Trading Center at McMaster University.

Sid’s unique experience brings a breadth of institutional knowledge to the retail investing universe. He covers equity derivatives, structured credit instruments and tax harvesting techniques to help Canadians make better financial decisions in the ever-changing landscape of financial markets and investing.