Can you Lose Money in a TFSA? (Yes, You Can)

Some links in this post are from our partners. If a purchase or signup is made through our partners, we receive compensation for the referral. 

Can you lose money investing in a TFSA account?

This is a commonly asked question amongst many Canadians and the answer is pretty straight forward.

As long as you never borrow money to invest in your TFSA, you will never be indebted to your account, but if your TFSA’s overall return on investment is negative, then you will have less money in your account then you put in.

For example, if you decided to buy $10,000 worth of Facebook stock through your TFSA, and the next day its stock price dropped 20% from when you bought it. Your new TFSA balance would be $8,000 and your total return would be – 20%.

So you still have $8,000 in your account, you don’t owe any money, but on paper you’ve lost $2,000 of your own money within your TFSA account.

Unless you decide to cash out at your 20% loss, these returns are just on paper, Facebook’s stock could (and probably would) recover and you would recoup those losses.

However, if you decided to sell your $8,000 worth of Facebook stock, well then you’ve officially lost $2,000 within your TFSA.

So yes, you can lose money in your TFSA account, but generating a 3%-10% rate of return shouldn’t be too difficult as long as you make smart, diversified investments.

With that said, if you’re looking for an easy way to diversify your investments with a TFSA, I’d recommend Wealthsimple. I, along with thousands of other Canadians, have used Wealthsimple for years – and I love it. All you do is set your risk level on a scale of 1-10 and they do the rest. Not only that, but the sign-up process is all done online and it takes a matter of minutes, and of course, it’s completely free to setup an account.

How to Not Lose Money in a TFSA?

Okay, so we know that you can in fact lose money in your TFSA.

Now you might be wondering, how do I avoid that!

Quick Note #1 – It is important to note that TFSAs are not investments themselves, but more so like a bucket for you to hold your investments within.

If you’re against any type of investment risk in your TFSA, that is totally understandable.

Some low risk financial products you can invest in to avoid the risk of losing money in your TFSA include High-Interest Savings accounts, GICs, Bonds and Money Market Funds.

Related Financial Geek Article: 6 Things You Need To Know About Day Trading in Your TFSA

High-Interest Savings Account

When it comes to safe investments, you can’t go wrong with a high interest savings account.

While you aren’t really “investing” when you park your money in a savings account, you still generate a small return on your money with virtually no risk.

Depending on the state of the economy, interest rates (your return) can fluctuate.

But as a general rule of thumb, high interest savings accounts offer interest rates anywhere from 0.9% to 3%.

When searching for the best high interest savings accounts, I’d suggest looking at financial institutions that operate solely online such as Wealthsimple, Tangerine and EQ.

You’ll notice these types of banks usually offer higher interest rates as they have less overhead expenses.

Quick Note #2 – Be careful to avoid promotional interest rate periods. Oftentimes financial institutions will offer a really high interest rate (upwards of 3%-3.5%) for a limited time to acquire new customers. 

Unless you already bank with the institution offering the promotion, these rates usually aren’t worth it.

Even if you have $10,000 to put into an account, an extra 2% interest over a 5 or 6 month period will equate to a very small amount and, in my opinion, isn’t worth the hassle.

GICs

If you don’t want to risk losing money in your TFSA, but you want to earn a little more than what a high interest savings account would generate, while at the same time maintaining no market risk, GICs are for you.

GIC stands for Guaranteed Investment Certificate.

Similar to a savings account, GICs are as safe and secure as investments come because they are covered by the CDIC.

Quick Note #3 – GICs make interest payments, monthly, quarterly or annually. 

The main difference between a GIC and a savings account is you will usually have to commit to leaving your money within a GIC for a specified period of time.

Generally, the longer your term – the higher your interest rate.

If you need to redeem your money before the end of your GICs term, you can do so, however you will be charged an early withdrawal penalty fee.

However, you can also invest in cashable or redeemable GICs.

These GICs are more flexible as you can withdraw your cash without penalty. They can also be more favourable for people who might need money quickly for emergencies or unexpected expenses.

But again, what you gain in convenience you lose in interest as redeemable and cashable GICs usually offer lower interest rates than non-redeemables.

Bonds

If you don’t mind a small amount of risk in your TFSA and you want a little more return than a GIC or a high interest savings account, bonds might be your best bet.

Bonds are like loans. If you invest in bonds you are loaning money to a government or corporation in exchange for regular interest payments plus your principal once the bond matures.

While I won’t go into depth on bonds in this article, my article here does great job of explaining the pros and cons of investing in bonds.

For now, the important thing to know is this- while bonds are more risky than a GIC or high interest savings account, they usually offer high interest rates while maintaining limited market risk.

Money Market Funds

Money market funds are low risk mutual funds that usually invest in GICs, Government or Commercial Bonds, CDs and other forms of relatively liquid, low risk investments.

While Money Market Funds can be a great form of low risk investment, they are actively managed and that comes at a cost. So you have to be careful that you aren’t paying management fees that outweigh your funds returns.

For example, if your money market fund gives a 3% return on investment, but the management fee is 2%, well your actual in pocket return is only 1%, and let’s face it, you can make a 1% return in a bad high interest savings account.

One option I didn’t suggest was to just put your money in cash. You might be thinking, isn’t that the most sure fire way to not lose money in my TFSA?

Funny enough, it’s actually the only way you are sure to lose money!

Due to inflation, you will lose purchasing power each year by not generating any type of return on your money.

In other words, products and services get more and more expensive each year (inflation), and by not generating any return on your money, you can buy less and less of that product or service each year (purchasing power).

To learn more about inflation, have a look at this article from Investopedia.

At the end of the day, if you are very risk averse and you are content generating 2%-5% returns in your TFSA, the 4 options outlined above are solid options for you.

Not only will you be generating a return on your money each year, but you can sleep easy knowing your money is in safe, low risk investments – while at the same time keeping up with inflation.

What Should You Do if You Lose Money in your TFSA?

If you lose money in your TFSA, the first thing to do is not panic. Just breathe and remember that this is often not uncommon, especially when you are first starting out and your money has not yet begun to compound.

Okay, what next?

Remind yourself that your loss only becomes an actual loss when you take your money out of that investment.

Now look at your investments, what did you invest in? Were they high risk stocks such as Bitcoin ETFs or Penny Stocks?

Ps. If you do plan on buying penny stocks within your TFSA, check out my article on some things you should know before doing so.

Or are they less risky investments such as blue chip stocks like Microsoft, Coca-Cola or market tracking index funds?

Maybe you have a combination of risk levels in your TFSA, who knows!

So now that you’ve looked at your investments, it is time for you to make a choice on what to keep and what to sell off.

If you are unsure, and you think you need a second opinion from an expert, I highly recommend doing so.

If you still believe in what you’ve invested in, holding onto your investments is potentially your best option, especially if you’ve made smart investments from the start.

If you don’t believe in your current investments anymore based on your research, new information or advice from a professional, it might be time to sell them off and take the loss.

The key point I want to make is this – stock prices fluctuate consistently, even for great companies, so if you invest heavily in equities, your portfolio will too fluctuate.

But as mentioned above, when you start out investing in your TFSA, you may lose money, even if you made solid investments with reputable companies with a successful track record.

So if you’ve made what you think to be solid investments in your TFSA and you still lose a bit of money at the start, don’t sweat it. Be patient and oftentimes these losses will turn into positive gains.

Conclusion

To summarize, yes, you can indeed lose money in your TFSA account.

As long as the money you put in your TFSA was yours to begin with, you won’t owe anyone money by losing money in your TFSA, but if your portfolio’s overall return on investment is negative then you will have less money in your TFSA then you put in.

If you are very risk averse or you don’t need your TFSA to generate a huge return for you, there are more than enough solid financial products out there to fit your needs while at the same time, keeping up with the silent killer – inflation.

Finally, remember not to panic if you do lose money in your TFSA.

If you made solid investments, you might have just caught the market at a bad time and you might be better off letting the market do its thing and recover naturally.

Geek, out.