Tax free savings or mutual funds (Canada)

Question

I have an RRSP that over the last two years has held at ~10.3% and I have an emergency fund of $10,000 that is just sitting in my savings account.

Would it be prudent to put that whole $10,000 into a mutual fund, slowly making money for me but have to pay taxes on it every year. OR, put the money into a tax free savings account? (TFSA)

I would contribute about $150/month as well.

EDIT:

I ran some spreadsheets on putting the $10k savings over two years and putting them in a mutual fund. Then once a year take the interest earned and put it into something higher risk like an equity fund. That way the mutual funds interest and re-invested dividends and growing the emergency fund and when I put the accumulated interest into a new fund I am not defeating the originals growth.

Answer 1

If you place your emergency fund in your TFSA, you can withdraw it at any time (e.g. in an emergency), and then replace the withdrawn money in the next calendar year. Be careful there; you pay a hefty fine if you replace it in the current calendar year if this leads to an overcontribution.

It's not an either-or thing, though. You could invest the money in a mutual fund inside your TFSA. I strongly recommend against this for your emergency fund, however. The whole point of an emergency fund is that you may need it immediately. So, keep it in an investment that you can liquidate quickly. Cash or very-near cash. While I obviously don't know your specific situation, I needed $10,000 within 24 hours and another $10,000 within two weeks during an emergency.

In a world where you have large sums of money, you'd max out your RRSP and TFSA with investments and keep your emergency fund outside of both. But most of us aren't in that situation. In that case, it makes sense to use your TFSA for your emergency fund.

I use some of my TFSA space for my emergency fund (savings account paying low interest, though people often like GICs) and some for investment (passive indexed stocks and bonds).

Note that you need to pay taxes on your savings account interest, too, if held outside your TFSA and RRSP accounts.