Just like with RRSPs and to some extent, RESPs, Canadians will have three options when it comes to Tax-Free Savings Accounts (TFSA):
Savings TFSA: ING Direct has already announced a TFSA account that can hold cash or GICs and is promising to keep its tradition of charging no fees and requiring no minimums. A savings TFSA that doesn’t charge any fees of any kind would be an ideal place to hold your emergency savings.
Mutual Fund TFSA: Once again, ING Direct has taken the lead in offering a mutual fund TFSA account with Streetwise funds on the menu. It would be a good bet that TD Mutual Funds will be competing with a TFSA product in which investors can hold the TD e-Series index funds (similar to RESP accounts). If you are planning on making long-term investments within a TFSA and you’ll be dinged with an admin fee with self-directed accounts, a mutual fund account might be your best choice.
Self-Directed TFSA: Typically offered by discount brokers, a self-directed TFSA will offer the most flexibility. However, investors need to watch out for fees. We are already getting a glimpse of the kind of fees that will be charged on these accounts. BMO InvestorLine recently announced a TFSA account with a $50 annual administration fee (waived for investors with $100K or more in InvestorLine assets) and a $25 withdrawal fee. Other major discount brokers can be expected to announce fees on similar lines. If you are eligible for an admin fee waiver and don’t plan on making withdrawals, a self-directed TFSA might be a good place to keep long-term investments.
Bottom Line: Initially, TFSA accounts will be small – a $5,000 contribution will earn about $150 in interest per year and save $60 in taxes at a marginal rate of 40%. In the first year, a $50 admin fee or a couple of $25 withdrawal fees will almost wipe out any tax savings. So, watch out for administration and withdrawal fees when opening a TFSA account.