Wealthsimple Trade is an online brokerage platform designed to help you create and manage your own investment portfolio. The platform offers both TFSAs (Tax-Free Savings Accounts) and personal accounts that you can use to store cash, trade stocks, ETFs, and other qualifying securities.
For self-directed investors, there’s a question to consider: Which is better for you in the Wealthsimple Trade TFSA vs. Personal Account debate?
Today, I will explain everything you need to know about this to make a more informed decision on the account type you should use to create your investment portfolio with Wealthsimple Trade.
Wealthsimple Trade TFSA vs Personal Account: What’s the Difference?
Using Wealthsimple Trade, you can create a TFSA, a Registered Retirement Savings Plan (RRSP), or a personal investment account. Since we’re discussing the TFSA and personal investment from an investor’s point of view, the RRSP is not relevant here.
Personal investment accounts are what you might expect to be the same as what the name suggests: Personal. With TFSAs, RRSPs, and other registered accounts, financial institutions have to register them because the government regulations are there.
There are rules about how much you can contribute, withdrawal amounts, and a host of other things you need to remember.
Personal accounts are also called taxable or non-registered accounts. They are the easiest type of account for you to open.
Withdrawing money from and depositing money into a personal account is easy because you don’t have to tell the government or the financial institution why you’re withdrawing the amount whenever you need to take some money out for expenses.
Personal accounts also come with the benefit of being as large or as small as you and your financial situation might allow. Unlike with registered accounts, you won’t expect to get a letter from the government regarding exceeding contribution limits and penalties for not following the rules.
Of course, personal accounts do come with their drawbacks. These are not registered accounts and offer no tax savings and deferrals. It means any income you earn through your personal account investments, whether through interest, dividends, or capital gains, will be considered taxable.
The taxes you pay might not be as high as what you might expect to pay for your income from a job, but anything is higher than the 0% tax rate that comes with a TFSA.
A TFSA is one of the best things to happen to Canadian investors. It is another registered investment or savings account that you can open with Wealthsimple Trade. As the name suggests, it is an account that the government incentivizes you to use by offering you tax-free returns on your investments.
TFSAs are called savings accounts, but their true value is locked as an investment vehicle. You can use this account type to hold cash and other securities like stocks, bonds, ETFs, and other fixed-income assets that qualify.
Think of a TFSA as a basket in which you can store a wide range of financial instruments and cash.
You make contributions to your TFSA using after-tax dollars. Since you’re contributing with money that you’ve already paid your taxes on, you won’t have to contend with taxes on the income you earn from investments held in the account.
This tax savings aspect of TFSAs is what makes this account type an attractive option for many Canadian investors.
Should You Use a Wealthsimple TFSA or personal account?
This example highlights why it is generally better to use your TFSA over a personal account:
Wealthsimple TFSA vs Personal Account Example – If you invest $1,000 into your TFSA account and $1,000 into your personal account. Suppose after one year they both are worth $3,000 each and you decide to sell the investments and withdraw the money. You’ll have taxes owing on the personal account, but not the TFSA. You’ll have to register the TFSA before you use it, whereas with the personal account you won’t have to.
How a TFSA works is quite simple. You open a TFSA account, deposit your money and investments in the account, and then watch your wealth grow. There are other registered accounts like the RRSP that offer tax benefits as well. However, the TFSA is far more flexible than them.
Like with a personal investment account, you can easily withdraw money from your Wealthsimple Trade TFSA. You don’t have to worry about early withdrawal penalties. However, the TFSA comes with government-mandated contribution limits and the limit can vary each year.
The Canadian government updates the contribution limit each year. Exceeding the contribution limit can become a problem and undo the tax-advantaged status for your account.
Overcontributing to a TFSA comes with a penalty of 1% of the excess contribution each month until you withdraw it from your account to remain within the limit available to you.
If and when you withdraw money from your TFSA, you cannot recontribute it to your account the same year without affecting your contribution limit. When you withdraw a particular amount of money from a TFSA, that amount is added to the contribution room for the following year.
Suppose you hit your TFSA limit, withdrew $1,000 from your TFSA in 2021 and now want to recontribute it. In that case, you would not recontribute it in the same year. You would have to wait till 2022 began without incurring a penalty.
The 2022 update saw an additional $6,000 being added to the TFSA contribution room. It means that you can contribute $6,000 more to your TFSA plus the $1,000 you withdrew in 2021.
And if you don’t contribute to your TFSA in any given year, the contribution room doesn’t go away. It is just rolled over to the next year. Suppose that you have been eligible to contribute to a TFSA since 2009 and you have never contributed once.
After the 2022 update, the cumulative contribution room available to you would be $81,500.
The contribution room update to TFSAs is indexed to inflation. For the longest time, contribution room updates were usually $5,500, but 2019, 2020, 2021, and 2022 saw a $6,000 increase. It is possible that the next update will be higher.
As long as you are 18 years or older and have a valid SIN number, you are eligible to open a TFSA. People who are not Canadian residents because they want to avoid making income tax payments but have a valid SIN can still qualify to open a
TFSA. However, any contributions you make to your TFSA as a non-resident will come with a 1% tax for each month your contributions remain in the account.
For the most part, whatever you can store in a personal investment account is eligible for your TFSA. This includes cash, mutual funds, stocks, GICs, bonds, and shares of certain small business corporations.
You can also contribute funds in a foreign currency into your TFSA, but they will be converted to Canadian dollars and it cannot exceed your available contribution room after the conversion.
Depending on the type of investments you hold in a TFSA, it’s possible for you to incur gains or losses on the amount you originally invested. Any gains or losses due to market movements of your investments do not affect your contribution room. Mainly just withdrawals and deposits will affect your TFSA room.
A TFSA is called a tax-free account, but that doesn’t mean there are no taxes at all. Certain rules set in place make some applicable taxes come into play. The most relevant example is if you hold foreign investments in your TFSA that pay dividends.
Dividends from foreign investments are subject to withholding tax. If you have bought a stock listed on NYSE or NASDAQ and stored it in your TFSA, any dividend income from those assets will incur a 15% withholding tax each year. Note that this is for the dividend income only, so it’s not too bad. Plus you won’t have to deduct this yourself so you won’t really even see it happen.
The short answer is a resounding ‘No’, you can’t use your TFSA for day trading. If the CRA rules that your TFSA is operating as a business, it will tax it as such.
Day traders who are unaware of the rules surrounding TFSAs might be very interested to start day trading and save a ton of money they might otherwise have to pay as taxes.
If you consider doing the same, you run a high risk of paying taxes on your TFSA.
The Canada Revenue Agency (CRA) checks registered accounts to ensure that investors follow the rules. You cannot use your TFSA as a business and the CRA considers active trading through a TFSA as a business.
Based on tax rules, a TFSA operating like a business will incur income taxes much like any business.
The CRA regularly conducts audits on taxpayers who are actively trading with their TFSAs. The government agency considers several things to determine whether the trading activity in a TFSA counts as a business, including trade frequency and whether you intend to hold investments for a resale at a profit.
If you are starting investing and you want to create a self-directed investment portfolio, you have two viable options: A TFSA or a personal account.
Both account types have qualities that make them good options for you to consider, but a TFSA would be far better for investors who want to maximize their investment returns due to the tax advantages and flexibility that come with the account.
Suppose you have far more money to invest, but that would exceed the contribution limits. In that case, you can always consider investing that money in a personal investment account after maxing out your TFSA contribution limit.
You can learn more about the trading platform and explore all the possibilities with the online broker by checking out my Wealthsimple Trade review.