How to Buy US Stocks in A TFSA (2022): 3 Separate Options

The Tax-Free Savings Account is one of the best investment accounts to use if you still have unused contribution room. It allows for all of your investments within the account to grow and be withdrawn tax-free.

Although there is a limit to how much money you can put in a TFSA, careful trading or investing has led some people to grow their TFSA to massive sizes. One former trader grew his account to $1.25 million in 2015.

If you are looking for how to buy US stocks in a TFSA, there are three approaches that you can take:

  • Buying US stocks through a discount brokerage
  • Having US stocks purchased for you through a robo-advisor
  • Working with an investment or financial advisor to purchase US stocks

Should you buy US Stocks in a TFSA?

How to Buy US Stocks in TFSA

US stocks are part of a long list of investments that can be held in a Tax-Free Savings Account.

Although the TFSA allows you to avoid Canadian taxes, you will still be responsible for US foreign withholding taxes. With regards to US stocks, this applies to the dividends that you should receive as a shareholder.

While a hypothetical US stock might pay a $100 dividend, you would only receive $85 in your TFSA due to US foreign withholding tax. The 15% US foreign withholding tax can’t be refunded within a TFSA account.

For the same US dividend-paying stock held within a non-registered account, there are specific instances in which you can apply for a foreign tax credit to eliminate the impact of the US foreign withholding tax.

If you are looking to purchase US stocks in your TFSA, make sure to add stocks that pay minimal dividends.

We will cover how to buy US stocks in your TFSA below and discuss each approach in more detail.  

Approach 1: Buying US Stocks in your TFSA through a Discount Brokerage

Approach 1: Buying US Stocks in your TFSA through a Discount Brokerage

You can purchase US stocks in your TFSA by yourself through the use of a discount brokerage.

A discount brokerage gives you the most control over your investments. Since you will be entirely responsible for the trading and investment management in your accounts, you will not be paying an advisory fee.

The five steps for buying US stocks in your TFSA through a discount brokerage are:

  1. Plan which US stocks to buy
  2. Open a TFSA with a Canadian discount brokerage
  3. Converting Canadian dollars to US dollars
  4. Buy your stocks
  5. Monitor your investments over time

Step 1 – Planning Which US Stocks to Buy

Before making a decision to invest in anything, you must first determine if US stocks are an appropriate asset class for your portfolio.

Stocks are usually labelled as medium-risk investments by brokerages in Canada. Stocks are riskier than bonds and can fluctuate quite a bit during periods of market turmoil.

Performing an appropriate level of research around your US stock picks is critical. In a professional setting, portfolio managers and research analysts typically analyze a company’s financial statements thoroughly before offering an opinion on its stock.

In order to reduce the likelihood of mistakes when trading, make sure to write down the ticker and exchange of each US stock that you would like to add to your TFSA.

Step 2 – Opening a TFSA at a Canadian Discount Brokerage

A lot of banks and financial institutions in Canada offer discount brokerage accounts. For options with minimal fees and commissions, consider Questrade or Wealthsimple.

Experienced investors and traders will want to try Interactive Brokers.

Other examples of possible Canadian discount brokerages include those offered by the banks and some credit unions. Almost all Canadian discount brokerages should support opening a TFSA.

If you are looking to purchase US stocks, you will need to make sure that the brokerage supports US dollar accounts. US stock purchases have to be made on the US side of your TFSA and in US dollars.

The opening of a TFSA account generally requires a lot of personal information as well as government-issued photo identification, regardless if it is through a discount brokerage or not.

Step 3 – Converting Canadian dollars to US dollars

US stocks will always have to be purchased in US dollars.

If you have funded your TFSA entirely with Canadian dollars, most discount brokerages will still allow you to buy US stocks directly.

You can search for a US stock ticker through your discount brokerage and place the trade. The brokerage will automatically convert your money to US dollars to complete the purchase.

Since discount brokerages charge fairly high conversion rates, this is not always the best approach.

One way to potentially reduce the fees that you are paying for Canadian to US dollar conversions is through Norbert’s Gambit.

What is Norbert’s Gambit

Norbert’s Gambit is a strategy for converting Canadian dollars to US dollars or vice versa. It can make sense in certain situations and save you quite a bit in conversion fees. Instead of paying a conversion fee of 2% or 3%, you are only paying for two trades – a buy and a sell.

The three steps involved with Norbert’s Gambit are:

  1. Purchasing a security (usually DLR.TO and DLR.U.TO) that trades in both US and Canadian dollars
  2. Calling your broker and asking them to “journal” the security to the other currency
  3. Selling the security, which is now in the other currency, once it settles

Norbert’s Gambit is fairly straightforward when using Questrade, but many people don’t want the extra hassle of this strategy. If currency markets are stable and you are looking to convert a large amount of money, this strategy can save you quite a bit in fees.

You can also convert between US dollars and Canadian dollars for specific amounts. Each discount brokerage has a different platform, but it can always be done online or over the phone. Keep in mind that these trades also cost the same currency conversion fee as if you were to purchase a US stock trade directly.

Step 4 – Buying the Stocks

Once your TFSA is ready for trading, it’s time to begin buying your researched US stocks. There are two main ways to place buy orders with most discount brokerages: limit orders and market orders.

Market Orders

The most basic type of order is the market order. The market order is executed immediately once you have inputted your stock information and clicked buy. Market orders have a large drawback: bid-ask spreads.

A stock’s bid-ask spread is what buyers and sellers are willing to sell at. Each price has a specific amount of supply or demand within a stock exchange’s book. Smaller stocks and more illiquid stocks tend to have a wider bid-ask spread.

When placing a market order, you have control of when a trade is executed, but not over what price it is executed at.

Limit Orders

Limit orders are the opposite of market orders. When you place a limit order, you can control what price to buy a stock at, but not when the stock will actually be bought.

Limit orders are typically open until your shares are entirely purchased or a specific length of time has passed.

Your limit order can be placed at any price. If place a limit order to buy a stock for more than it is currently trading at, you will likely be filled immediately at the lowest possible price.

Alternatively, if you place a limit order to buy a stock at a price below its current market value, you will have to wait until the stock price reaches or drops below your inputted price.

We strongly recommend using limit orders early on in your investing journey. Placing a limit order around the current market price will allow you to know exactly how much you will be investing in each stock.

Keep in mind that limit orders can sometimes only get partially filled, depending on how a stock’s price moves.

Step 5 – Monitoring your TFSA

Monitoring your stocks over time is a key ingredient to investment success.

US stocks can face several events which affect their stock price. Some examples include:

  • Changing, offering, or removing a dividend
  • Starting a share repurchase program
  • Doing a stock split or reverse stock split
  • Declaring bankruptcy

Goals, objectives, and risk tolerance can all change over time. Remember that your TFSA is usually just one part of your overall investment portfolio, which generally includes other accounts such as an RRSP and a non-registered account.

Approach 2: Buying Stocks through a Robo-advisor

Approach 2: Buying Stocks through a Robo-advisor

An alternative to buying stocks yourself through a discount brokerage account is to use a robo-advisor to gain exposure to US stocks.

Robo-advisors are becoming more widespread as technology and algorithms improve. They are designed to replace a human advisor for only a fraction of the cost.

Questrade offers Questwealth, and Wealthsimple offers Wealthsimple Invest.

When robo-advisory platforms put together a portfolio for you, you can get direct US stock exposure or indirect US stock exposure through an ETF. Robo-advising does come with its own pros and cons which you should be mindful of.

Approach 3: Working with an Investment or Financial Advisor

Approach 3: Working with an Investment or Financial Advisor

US stocks can also be purchased within your TFSA through your investment or financial advisor. In some cases, your advisor will be managing your money on a discretionary basis.

A discretionary money manager generally places trades in your accounts, like the TFSA, without calling you to confirm trades. If you are already working with an advisor, they may already be buying US stocks in your TFSA.

A non-discretionary advisor calls their clients over the phone to confirm any buy or sell orders. They may be able to recommend some US stocks or place trades on your behalf for US stocks that you would like in your TFSA.

The fees for working with an advisor are usually high and we do not recommend this approach.

Conclusion

If you have contribution room in your TFSA and would like to purchase US stocks, be mindful of foreign withholding tax. US stocks with high dividend yields may make more sense to be included in accounts outside of your TFSA.

US stocks can be purchased in your TFSA through a discount brokerage, through a robo-advisor, or through a financial or investment advisor that manages your investments. 

Purchasing US stocks through the discount brokerage will put you in full control of your TFSA account and eliminate any advisory fees.

Using a Robo-advisor for your TFSA can also offer you US stock exposure. This is usually much more inexpensive than working directly with an advisor.

Working with an investment or financial advisor to add US stocks to your TFSA is likely the most expensive option in terms of total fees.

If you are still deciding on which US stocks to purchase in your TFSA, consider using a stock screener. Stock screeners can help with a lot of the necessary research that is needed to find good stock ideas.  

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Author Bio - Christopher Liew is a CFA Charterholder with 11 years of finance experience and the creator of Wealthawesome.com. Read about how he quit his 6-figure salary career to travel the world here.

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