Andrew has an MBA and has been writing for The Motley Fool Canada since 2014. As a contrarian investor, Andrew seeks out dividend opportunities the market is missing. He is a big fan of harnessing the power of compounding to grow a portfolio for retirement.
Latest posts by Andrew Walker (see all)
TFSA Investors: Where to Put $7,000 in 2024 - February 29, 2024
Is TD Bank Stock a Buy Now After Solid Earnings? - February 29, 2024
TFSA Passive Income: Is Fortis Stock a Buy Now? - February 29, 2024
The government created the TFSA in 2009 to give Canadians a new vehicle for saving money for the future.
TFSA 101
Since its inception, the TFSA contribution limit has increased each year and is now as high as $69,500. The TFSA limit increased by $6,000 in 2020.
The TFSA limit hike for 2021 will be at least $6,000. The CRA raises the size of the annual increase according to inflation measured by the Consumer Price Index, rounded to the nearest $500.
Retirees, mid-career investors, and younger savers can all benefit from using the TFSA to meet financial goals.
Retirees can take advantage of the tax-free properties of the TFSA to earn additional income that won’t put their Old Age Security (OAS) pensions at risk of a clawback. The CRA implements the OAS pension recovery tax when net world income tops a minimum threshold. Money received from TFSA investments are not used in the net world income calculation.
Investors in the middle years of their work life can use the TFSA as a retirement savings tool to complement their RRSP investments and company pensions. The 2020 pandemic has also prompted people to use the TFSA to create an emergency fund.
Younger investors can take advantage of the TFSA to start building their retirement portfolios. The TFSA is more flexible than an RRSP when it comes to getting full access to funds. In addition, advisors often suggest saving RRSP room for later years when a person would normally be in a higher tax bracket. The RRSP contributions are used to reduce taxable income for the relevant contribution year.
Best stocks for TFSA investments
Inside a TFSA the full value of dividends and capital gains remain beyond the reach of the CRA. Income investors, such as retirees, can put the money right into their pockets.
Investors who use the TFSA to build a fund for retirement or another savings goal can use dividends to buy new shares. This strategy harnesses the power of compounding. The impact on the portfolio can be substantial over the course of two or three decades.
The top stocks to own tend to be those that pay reliable and growing dividends supported by higher revenue and increased profits.
Let’s take a look at one top stock that has rewarded long-term investors with fantastic returns and should continue to be an attractive pick for a self-directed TFSA portfolio.
Royal Bank
Royal Bank (TSX:RY)(NYSE:RY) is Canada’s largest financial institution and one of the top 15 globally by market capitalization. The bank faces challenges in the current environment with pandemic lockdowns driving up unemployment. So far, government aid and deferrals on loans have helped households and businesses navigate the storm. The economy is recovering, but ongoing pain is expected through the first half of next year.
That said, Royal Bank remains a very profitable business and has the capital to ride out the downturn. The dividend should be very safe. Investors who buy the stock today can get a 4.5% dividend yield.
A $20,000 investment in Royal Bank just 25 years ago would be worth $600,000 today with the dividends reinvested. This would now generate $27,000 per year in dividend income.
The bottom line
The TFSA is a useful savings tool for Canadians at all points of their careers. Those that have a number of years before retirement can take advantage of the power of compounding to build a significant personal pension fund.
While Royal Bank remains attractive as part of a diversified TFSA portfolio, other top stocks in the TSX Index should also be on your radar.
If you run up a multi-million-dollar TFSA balance by trading options frequently, the CRA may deem your trading activities to be a business and tax you accordingly. In this scenario, you'll pay even more taxes than you would in a normal account, because income taxes are higher than capital gains and dividend taxes.
You have to convert it to a registered retirement income fund (RRIF) or payout annuity by the end of the year you turn 71. Or, you'll have to take the RRSP money in cash (and pay tax on it). But you can keep your TFSA open. And you can keep contributing to it as long as you wish.
The annual tax-free savings account contribution limit is the maximum amount of money you can contribute to your TFSA account each year. Any amount you contribute to your TFSA throughout the year counts against what's called your "annual contribution room." For 2024, the maximum contribution is $7,000.
Depending on the type of investment held in your TFSA, you can generally withdraw any amount from the TFSA at any time. Withdrawing funds from your TFSA does not reduce the total amount of contributions you have already made for the year.
The TFSA contribution room is what Canadians have accumulated for every year since 2009 that they have been at least 18 years of age, had a Social Insurance Number, and been a Canadian resident. While the TFSA contribution limit for 2024 is $7,000, the maximum contribution amount is $95,000.
How and when can I withdraw money from my TFSA? You can withdraw funds from your TFSA any time you want1 and you don't have to reach a certain age before you withdraw your money. Withdrawals made from your TFSA will be added back to your TSFA contribution room the following year.
It also means that starting on January 1, 2024, eligible Canadians will now have a cumulative lifetime TFSA contribution limit of $95,000 (see “What is the lifetime contribution limit for TFSA?” below for examples and charts).
Remember, the key to getting the most out of your TFSA is to make regular contributions, invest and save wisely, and use it for long-term savings goals. Also, avoid withdrawing the TFSA for as long as you can. The earlier you start contributing, the more you can take advantage of the compounding effects of the TFSA.
At one extreme, if you buy or sell a stock once a month there should be no problem. At the other extreme, if you are trading almost every day and holding stocks for only a few days at a time, that will be considered carrying on business and the TFSA will be taxed. So be careful about this!
Cryptocurrencies cannot be held in a TFSA directly, although it is possible to hold them in a TFSA indirectly through an exchange traded fund [IT1] or similar securities. The TFSA itself is exempt from income tax and withdrawals from a TFSA by the individual do not give rise to an income inclusion.
Your TFSA lifetime contribution limit is $75,500. Your ongoing contribution amount. There is new contribution room every year. For 2024, you can contribute up to $7000 plus any unused contribution room from previous years.
You can have more than one TFSA at any given time, but the total amount you contribute to your TFSAs cannot be more than your available TFSA contribution room for that year.
Growth on your investments inside a TFSA does not affect your contribution room, and you can take money out when you want, for any reason, without paying any tax. If you take money out, you can re-contribute it the following year, in addition to the annual maximum. There are penalties for over-contributions.
You can typically withdraw any amount from your TFSA, at any time. Some withdrawal restrictions and limitations may apply to certain investments. For example, depending on your investments, you may not be allowed to make withdrawals until the end of a specific term.
Introduction: My name is Geoffrey Lueilwitz, I am a zealous, encouraging, sparkling, enchanting, graceful, faithful, nice person who loves writing and wants to share my knowledge and understanding with you.
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