We’re about a month into 2026 now, and that means you get an extra $7,000 worth of tax-free savings account (TFSA) contribution room. Last year, the Federal government approved $7,000 worth of new room for the current year. That brings the accumulated total from the date when the TFSA was created in 2009 to $109,000. If you were 18 or older and have not contributed to a TFSA yet, you can contribute that entire amount this year! If you turned 18 after 2009 or have already contributed to a TFSA, then your total amount varies.
The $7,000 worth of TFSA room added for 2026 brings the cumulative total to a surprisingly substantial amount. In this article, I will explore how to use the new TFSA contribution room to minimize your taxes and maximize your investment returns.
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How far $7,000 can go
$7,000 might not seem like a whole lot of money, but it can go surprisingly far if invested wisely.
You can tell how much an investment will grow in a given amount of time by taking one plus the estimated return, all to the power of years elapsed. So, if the return is 10% and the investment horizon is 30 years, the formula is 1.1 to the power of 30. That works out to 17.5. So, starting with $7,000 and earning a 10% annualized return, you can earn to $122,145 after 30 years of compounding. That’s a pretty substantial ending amount for a “modest” 10% return – the sort of return one typically expects to earn with stock index funds.
What to hold in a TFSA
There are basically four types of investments you can hold in a TFSA:
- Stocks, including stock exchange-traded funds (ETFs) and real estate investment trusts (REITs).
- Bonds, including bond ETFs.
- Guaranteed investment certificates (GICs).
Which of these asset classes is best for your TFSA?
Everyone’s needs are different, so there is no one-size-fits-all solution. However, generally speaking, interest-bearing bonds benefit more from the TFSA’s tax shelter than stocks do. The reason is that stock dividends and capital gains have various tax credits applied to them, even when held in taxable accounts, while bonds do not. Bonds are taxed at your marginal tax rate, no ifs, ands or buts. So, it is best to hold them in a TFSA.
Regardless of what you hold in your TFSA, it’s best to start buying it now, because the longer you invest, the more compounding you ultimately enjoy.
A good fund to hold in a TFSA
Despite what I said about bonds being ideally suited to TFSAs, the reality is you’re probably going to have most of your money in stocks. Given this, a fund like the iShares S&P/TSX 60 Index Fund (TSX:XIU) could be an ideal holding for you.
XIU is a broad market index fund based on the TSX 60 index. The TSX 60 index consists of the 60 biggest publicly traded companies in Canada. XIU actually holds the vast majority of them. The fund has a 0.15% management fee and a 0.18% management expense ratio (MER), both of which are not overly high. It is also Canada’s biggest and most widely traded fund, which results in a narrow bid-ask spread and low trading costs. Overall, XIU is a pretty good fund to hold in your TFSA for the long term.
