Using a TFSA as a mere savings account is a terrible idea. Proper use of the account can create a comfortable retirement for Canadians — but you have to invest money in the account to unlock its full potential. (How does $4.7 million sound?)
Here’s how to get started investing in a TFSA for 2026.
Prefer to read? There’s a transcript below.
Nick Sciple: I’m Motley Fool Canada Senior Analyst Nick Sciple, and this is The Five-Minute Major, here to make you a smarter investor in about five minutes. Today, we’re discussing the new 2026 TFSA contribution limits and how to invest that new room. My guest today is Hidden Gems Canada Lead Advisor, Jim Gillies. Jim, thanks for joining me.
Jim Gillies: Thank you for the invite, Nick. I love the TFSA, and I’m thrilled to be talking about it today.
Nick: Happy New Year, everybody! It is officially January, which means the CRA has handed Canadian adults the new TFSA contribution room. What do investors need to know about these new numbers, and more importantly, what is the biggest mistake you see people making when they invest in their TFSA?
Jim: Oh, boy, do I have some thoughts, Nick. The TFSA, of course, stands for Tax-Free Savings Account, and there are two important things to take away from the name there. First of all, the tax-free’s the good part.
What is the TFSA contribution limit for 2026?
But we’re gonna talk about the problem in a minute. But, okay, so you’re getting $7,000 of contribution room. You’re not getting free money here, but it’s money that you can contribute and save for the future for your retirement years, or for your future just in general, if you don’t particularly want to retire, or whatever.
This started back in, I think, 2009, 2010, with I think it was $5,000 of contribution room, and it was indexed to inflation, moving in $500 increments.
So if inflation was 2% a year, 3% a year, you know, about after four or five years, it went to $5,500, then it was $6,000, it was briefly $10,000; that’s a whole political thing.
Last year was $7,000, this year’s gonna be $7,000. Probably, if inflation follows its current path, it’s gonna be about $7,500 next year. So you’ve got all of this contribution, and it’s cumulative.
If you’ve not filled your prior contribution room, get on that, okay?
Biggest mistake Canadians make with TFSA accounts
The second thing is a disturbing number of Canadians do not use the TFSA.
And the TFSA is the most powerful wealth-building tool that you have in your Canadian savings arsenal, yes? Above the RRSP, okay?
Especially if you’re a younger Canadian, TFSA should be absolute your top priority. Now, the problem with the name: I hate the name “Tax-Free Savings Account.” This is not a savings account. This is a wealth-building tool, and I hate when I see [that] roughly, just over half of Canadians have TFSAs. And the ones that have it, about half of them use it as a savings account, so they throw it in money, they make it in cash, might earn 2 or 3%, they throw it in GICs. It’s terrible! No! No! This is a wealth creation tool, okay?
How much money can you make in a TFSA over time?
So, steady contributions. And for example, if you were 20 years old today, and you started today, and let’s assume inflation for the next four decades, 40 years, is 2%. And let’s assume you can earn roughly 10%, which is roughly the stock market’s return since the modern-day annualized return. If you start at age 20, go to age 60, maximize your contribution every year. Figure out what you need to do, or figure out what you need to contribute every pay period. Again, the contribution room goes up in $500 increments following CPI. So let’s assume CPI is 2%, you fill out your contribution total, you make 10% returns. Over a 40-year period, you will have contributed about $450,500.
The value of that account in 40 years will be just shy of $4.7 million. Okay? Tax-free. You will owe nothing to the government.
That is why I hate the term “savings account.” This is not a savings account.
Maximize your contribution, invest it, never touch it.
You will have a wonderful retirement.
Where to invest in a TFSA in 2026
Nick: Okay, Jim, so maximize your contribution. This is a wealth-building vehicle. You shouldn’t be holding cash in your TFSA, so that leads us to another question. What should you be holding? What would you be investing this new TFSA room, this new capital, into your TFSA portfolio in 2026? What investments would you be looking at?
Jim: I mean, obviously, it’s personal, everyone’s gonna be different, okay? But I’m gonna say two things. One, first, No. 1, the biggest risk with a TFSA is not contributing, not making use of the incredible tool. The second-biggest risk is not taking enough risk. This is not a savings account, don’t put it in GICs, don’t keep it in cash.
I’m just gonna take this approach for a new investor, or my son. My son is 21 years old, we’ve been contributing since he was 18. Okay, it’s his money, not mine.
If you do nothing else — and I would encourage you to do nothing else before you have $100,000 in this account — but if you do nothing else, contribute to index-hugging ETFs. So, get one that tracks the Canadian market, so that’s the TSX60. (TSX: XIU), I believe, is the one that tracks it. That’s XIU on the Toronto Stock Exchange.
As well, you want to track the S&P 500. There’s a host of S&P 500 tracking tools. And then maybe if you even want to add in a little Pan-Asian, Pan-European, index as well, I believe XEF (TSX: XEF) is the one on the TSX that iShares offers. And if you did a 25%, 50%, 25% allocation across those three, and then never touch it, keep on adding every year when a new contribution room comes up, DRIP all your dividends — that means reinvest your dividends automatically, you can get your broker to do that for you — you will have an obscene amount of tax-free money, tax-free capital, by the time you hit 60, [if you’re] using this as a wealth creation, retirement tool, and not a savings account.
Nick: Yeah, it’s great advice. This is a wealth creation tool. Participate, and try to participate in the stock market if you can. That’s all our time for this edition of the Five-Minute Major. If you want more stock and investing ideas from us, click on the info icon in the upper right-hand corner. Until then, thanks for joining us, and Fool on!
