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As millennials become the dominant generation in Canada's work force, the question arises for them: What's the best way to use their tax-free savings accounts?

For those born in the 1980s and '90s, the TFSA is an attractive investment vehicle in an economy marked by perpetually low interest rates, an uncertain and ever-disrupted job market and house prices that are rising out of reach.

"The TFSA is a great tool for millennials to grow their investments over the long term, tax-free," says Sandra Foster, a financial author and president of Headspring Consulting Inc. in Toronto. Unlike a registered retirement savings plan (RRSP), which requires people to pay tax on their savings later, the growth in TFSA funds is never taxed.

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Try our calculator: Here's how much your TFSA could be worth

"But the TFSA is not an investment itself – it is a special type of account with some tax perks and certain rules. If you have cash or investments outside an RRSP, you should be using the TFSA," she says.

Any Canadian older than 18 with a social insurance number who hasn't started a TFSA yet can contribute up to $52,000. Since 2009, when TFSAs were started, the yearly limit for contributing has varied between $5,000 and $10,000 and is set this year at $5,500, but Canadians who haven't contributed in earlier years are allowed to make up for lost time.

"Unfortunately, many millennials are not aware of the full tax savings potential and often invest in high-interest savings accounts at a bank," says Neville Joanes, portfolio manager and chief compliance officer at WealthBar Financial Services Inc., a Vancouver robo-advisor firm.

"They should take advantage of the TFSA's benefits, focusing on diversified and low-cost investments. For millennials the focus should be on a diversified portfolio that's structured to deliver growth," he says.

Millennial TFSAs should be diversified in multiple ways. "We allocate across global equity markets – Canada, the United States and international – as well as fixed income, plus income strategies and real estate," Mr. Joanes explains.

"We achieve this for millennial clients using ETF [exchange-traded fund] portfolios and private investment pools, which have seen particularly high returns and low volatility. The gains are tax sheltered as long as you're using a TFSA."

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Mr. Joanes says the ETFs in WealthBar's portfolio that have driven returns included Canadian equity from Horizons S&P/TSX 60 Index ETF and U.S. high yield in the form of the BMO High Yield US Corporate Bond Hedged to CAD Index ETF.

While it's easy to park TFSA money in a few ETFs and forget about it until it's time to look at long-term growth, millennials in particular should consider other factors, says Tom Trainor, managing director, Hanover Private Client Corp. in Toronto.

Job security is one example, and "how fast they think they can regain employment if they're laid off," he says. "The big thing to focus on is a really frank appraisal of when you think you're going to need the money back," Mr. Trainor says.

"Not having an answer is an answer," he adds, because it suggests that the investor is in no hurry and can opt for longer-term growth. "If you truly don't think you need these funds for five to 10 years, you should be going for growth," he says.

Ms. Foster says millennials with short-term investment goals – saving for a car or a home down payment, for example – should consider taking minimal risk with their TFSA funds. "Selecting investments for your TFSA depends on what is appropriate to your personal situation, your goals and objectives," she says.

"If the money in your TFSA is for short-term savings, such as an emergency fund, or for a major purchase and you want to make sure it is all there when you need it, your money is better off not invested in anything that goes up and down in value."

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For such investors she recommends "good old-fashioned GICs [guaranteed investment certificates] or money market funds." While these investments will earn only slightly more than the money would gain if it sat in a bank account, "the payoff for the low return is the security of your capital," she says.

"If the money in your TFSA is for the long term, such as your retirement, then you're actually building a personal pension plan to meet this goal," Ms. Foster adds. In that case, "you could select from a wide range of investments to build your balanced portfolio."

Millennial investors will likely want to consider ETFs and online brokerages or robo-advisors because of the relatively low fees they charge for trading. With online brokers, available from virtually every financial institution's website, investors buy and sell their own securities for a flat fee.

Robo-advisors offer the same ability to buy and sell but also automatically rebalance their clients' portfolios according to the guidelines that clients provide beforehand. Some robo-advisors also offer online or telephone advice.

The first step, of course, is to actually invest.

An Environics Research Group survey last year, commissioned by Toronto-Dominion Bank, found 36 per cent of Canadian millennials saying they didn't know whether it was the right time to invest, 22 per cent saying it was definitely not and 37 per cent saying they do not invest at all.

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Since that survey was completed in March of 2016, the S&P/TSX has risen to roughly 15,590 points on May 11, 2017, from about 13,000.

Personal finance editor Roma Luciw tells you what you should be doing with your money if you're never going to be a homeowner.
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