The Tax-Free Savings Account (TFSA) is one of Canada’s most powerful wealth-building tools, offering tax-free growth on investments. Whether you’re a seasoned investor or just starting, 2025 presents a prime opportunity to leverage your TFSA contribution room. If you haven’t contributed before, you could have as much room as $102,000 available to grow your wealth without paying a penny in taxes. But how can you make the most of this significant advantage? Let’s explore a few smart ways to invest in your TFSA this year.
Conservative approach: Guaranteed income with GICs
For risk-averse investors, Guaranteed Investment Certificates (GICs) provide a safe and predictable option. Currently, one-year GIC rates are hovering around 3.7%, meaning that if you were to deposit the full $102,000 in a GIC, you’d earn $3,774 in tax-free interest in one year.
However, there is one caveat: GIC rates are influenced by broader market trends and interest rate fluctuations. While the principal is guaranteed, the returns may not be as attractive in the long run, depending on how rates change. For those who prefer safety but still want some potential for growth, market-linked GICs could be a better fit. These products offer a return tied to market performance, but still provide the security of a guaranteed principal. For example, if the market were to return 10%, you could expect a more modest, yet stable return of around 7%.
Balanced portfolio: ETFs for steady growth
For those seeking a balanced investment strategy, Exchange Traded Funds (ETFs) offer a diversified approach without the need for constant monitoring. A solid option is the iShares Core Balanced ETF Portfolio (TSX:XBAL), which maintains a 60/40 equity-to-fixed-income ratio. This well-diversified fund allows you to gain exposure to multiple asset classes and global regions, all while keeping fees low with a 0.20% management expense ratio (MER).
With a 4.3% recent distribution yield, this fund surpasses traditional GICs in terms of income generation. Over the last decade, the fund has delivered annualized returns of 6.1%, with even stronger performance of 7.1% over the last five years. For investors looking to steadily build wealth over time, this ETF offers an attractive balance between risk and reward.
Growth potential: Equity ETFs for long-term gains
If your goal is to maximize long-term growth, consider a 100% equity-focused ETF, such as the iShares Core Equity ETF Portfolio (TSX:XEQT). This fund is diversified across global markets, with the largest allocations in the U.S. (44%) and Canada (24%), followed by exposure to Europe and Asia. It also offers a low 0.20% MER and a distribution yield of about 3.2%.
This portfolio delivered an 11.5% annualized return over the last five years — substantially higher than traditional GICs. Investors who are comfortable with market fluctuations and are focused on long-term capital appreciation may find this ETF to be an ideal option for their TFSA.
Stock picking: Targeting top performers
For those with a knack for stock picking, the TFSA can be an excellent space for high-growth investments. One top example is Constellation Software, a leading tech company with an outstanding track record. Over the past decade, the company has posted annualized returns of 29%. While the stock trades at a high price-to-earnings (P/E) ratio of about 43, it has consistently outperformed, making it a strong candidate for a TFSA, where the tax-free growth can significantly amplify your returns.
The Foolish investor takeaway
By strategically using your TFSA contribution room in 2025, you can tailor your investment approach to suit your risk tolerance and financial goals, all while taking advantage of tax-free growth. Whether you’re focused on guaranteed income, a balanced portfolio, equity growth, or high-performance stocks, there are countless opportunities to build wealth within this powerful account.
