With a new year comes new TFSA contribution room. For 2025, the amount of new room being added is $7,000. That’s $7,000 of additional tax-free account space you can invest money in – even if your TFSA is maxed out this year!
With that being said, getting extra TFSA contribution room is only half the battle. Once you have the room, you need to deposit money, and invest said money well. There’s a real art to it. In this article, I will explore how to maximize your returns with your 2025 TFSA contribution room.
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Focus on ETFs
The best way for most investors to maximize their returns is to buy and hold exchange-traded funds (ETFs). ETFs, especially index ETFs, diversify your holdings, and spread out your specific risk (the risk in a specific stock separate from its market risk) to the point where it’s negligible. The end result is lower risk with the same expected returns, compared to individual stock picks.
Studies show that index ETF investments outperform most active strategies over time. Additionally, index ETFs incur lower management fees than actively managed funds, which compounds the outperformance even further. The end result is an investment that, from the perspective of an individual retail investor, is hard to argue with.
A few ideas worth considering
It’s one thing to say that index funds are optimal for most investors, but quite another to actually invest profitably in such funds. Like anything else, there are better and worse index funds. The following are two Canadian ETFs that are likely to deliver satisfactory returns over time.
The iShares S&P/TSX 60 Index Fund (TSX:XIU) is a market cap-weighted index fund based on the TSX 60 Index, the index of the 60 biggest Canadian stocks. The fund has 60 stocks, which is an ample amount of diversification. It has a 0.18% management expense ratio, which is low. XIU has a 2.9% trailing dividend yield. Finally, as the most liquid and widely traded ETF of Canadian equities, it has a narrow bid-ask spread – basically this is another form of “low fee” as market makers pocket a killing on funds with wide spreads. So XIU has a lot of characteristics that make it desirable for many Canadian investors.
Next up we have the BMO Canadian Dividend ETF (TSX:ZDV). This is a dividend ETF offered by the Bank of Montreal. Like the XIU ETF, it has a considerable amount of diversification (50 stocks). However, ZDV is a themed ETF with a focus on dividend stocks. As a result of its “thematic focus,” ZDV has a higher fee than XIU (0.39%), but also a higher dividend yield. If you heavily prioritize regular cash income, ZDV may make sense for your portfolio.
And last but not least…
Guaranteed investment certificates (GICs) and related fixed income investments can make great TFSA holdings because they benefit from being tax-sheltered to a great extent. Fixed income investments do not get the dividend tax credit. As a result of this, GIC/bond interest enjoys more tax savings from being sheltered in a TFSA than dividend income does (holding the amounts of income constant). So, if you’re going to be holding GICs, be sure to consider holding them in your TFSA.
