What Is a Self-Directed TFSA & How Does It Work?

Is there a difference between a basic Tax-Free Savings Account (TFSA) and a self-directed TFSA? Absolutely — a self-directed TFSA, much like a self-directed RRSP, allows the investor more freedom and control over their investment choices. Do-It-Yourself (DIY) investing has become far more prevalent in past years, and a self-directed TFSA is one type of DIY investing. When you have more control over your investment options, you need to remember a few things. 

It’s important to note that with basic TFSA accounts, you have an investment manager managing the account. If you’re opting to choose funds and investments yourself, make sure you have a strong understanding of investment and personal finance basics. 


What Is a Self-Directed TFSA?


A self-directed TFSA is not a product. It’s an account that houses investment products or funds within and is generally set up or arranged through a financial institution. Within this account, you make all the investment decisions — not a broker, not a banker, not an investment manager. 

A self-directed TFSA can hold a variety of investment types:

  • Cash
  • Mutual Funds
  • Stocks
  • ETFs and Index Funds
  • Bonds
  • GICs
  • Gold and silver
  • Alternative investments*


But certain investment types don’t qualify for self-directed TFSA accounts. These can include land or property, shares in a company that you own more than 10% in, or shares in a non-Canadian company that has traded on a designated stock exchange in the past but is no longer listed. 

*You can invest in some forms of alternative investments, such as mortgage investment corporations (MIC), in a self-directed TFSA, but there are limits on what a qualified investment is. Make sure you check with a financial advisor before investing in any alternative investment strategies within a self-directed TFSA, or you could be heavily taxed.  


What You Should Know Before Considering a Self-Directed TFSA


As with any new investment strategy, you’re going to want to be sure you have some foundational knowledge before jumping in. Make sure you understand the basics of investing and personal finance and how a self-directed account works.

You’re going to need to know:

  • What your risk tolerance is,
  • Your short and long-term financial goals,
  • Why diversification is so important,
  • How to follow an investment plan instead of making emotional decisions based on market volatility,
  • When to seek help,
  • How to research potential funds and understand graphs and projections, and
  • How the fee structure works. 


Fees in a Self-Directed TFSA


There are fees associated with any investment. The trick is paying the lowest amount for the best payback. The fees will depend on the specific brokerage that holds the account. You’ll want to know if your account has annual maintenance fees, transfer fees, closing fees, commissions on certain investments like stocks, or trading fees. 

It’s important to note that self-directed TFSA accounts have contribution limits, just like any basic TFSA. 


Setting Up a Self-Directed TFSA


Opening a self-directed TFSA is similar to opening any other kind of investment account. You have the option to open an account through a bank, or financial institution, or an independent brokerage. Many of these companies have the option to open an account online. 


The Advantages & Disadvantages of a Self-Directed TFSA


The main advantage is control over your investments. In addition to this, self-directed TFSA accounts generally have lower or no management fees (unless you’re buying mutual funds that have fund managers). Also, historically, investors enjoy higher returns on self-directed accounts. The success of your investment is dependent on your ability as an investor, the markets, and your investment choices. 

The disadvantage of a self-directed TFSA is the risks. Any time you decide to manage your own investments, there is risk involved. You may not diversify your portfolio enough, or you could pick the wrong investments. The main risk with a self-directed TFSA is yourself. 

Cooper Pacific offers self-directed TFSA accounts with no fees, allowing you the freedom to invest and manage your own money without skimming off the top. To learn more, contact Jordan on our team today. 

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