TFSA Pension: How to Turn $60,000 Into $1.4 Million and Pay No Tax to the CRA

Here’s how Canadian investors can build a tax-free retirement portfolio to complement their CPP, OAS, and employment pensions.

Canadians have historically relied on CPP, OAS, and company pensions to fund their retirement. Contributions to RRSPs are also popular and continue to be attractive for building a portfolio.

One drawback to each of the above sources of income is that they are all taxed by the Canada Revenue Agency.

As a result, it makes sense to search for alternatives to increase retirement income without paying additional taxes. This is particularly important for retirees who are receiving Old Age Security (OAS) pensions and at risk of seeing their payments clawed back due to a breach of the recovery-tax threshold.

The Tax Free Savings Account (TFSA) is a great tool to build retirement wealth without paying tax on any investment gains or withdrawals. The TFSA contribution limit increases by $6,000 in 2020, bringing the maximum total space to $69,500 per person.

That’s enough room to create a solid self-directed pension fund that can grow until you decide to retire.

A popular strategy for building wealth is to buy quality dividend stocks and use the distributions to acquire more shares. This takes advantage of a powerful compounding process that can turn modest initial funds into a large pool of cash for the golden years.

Let’s take a look at one stock that has proven to be a rewarding pick and should continue to be a solid choice for a TFSA pension fund.

CN

Canadian National Railway (TSX: CNR)(NYSE: CNI) is an important piece of the machine that drives the Canadian and U.S. economies. The company carries raw materials and finished goods from producers and manufacturers to their end customers. Everything from forestry products to cars, coal, crude oil, and fertilizer is transported along CN’s extensive rail network.

CN is the only rail company in North America with routes connecting to ports on three coasts, giving it an advantage when securing contracts for intermodal and other international shipments.

The nature of the rail industry makes it unlikely that new competing tracks would be built along established routes, so there is a sustainable competitive advantage.

CN still has to compete with trucking companies and other railways in some areas and management is investing the funds needed to improve efficiency and ensure it has the infrastructure to meet growing demand.

The company spent nearly $4 billion on capital projects in 2019, with money going to network upgrades, new locomotives, and additional rail cars.

The business is very profitable and the board is generous when sharing the earnings with investors. CN has a strong track record of share buybacks and has raised the dividend by a compound annual rate of about 16% over the past 20 years.

Returns?

A $60,000 investment in CN stock just two decades ago would be worth more than $1.4 million today with the dividends reinvested.

The bottom line

CN might not deliver the same returns over the next 20 years, but the company remains an attractive pick to anchor a balanced TFSA portfolio.

If you are searching for a way to build retirement wealth, buying quality dividend stocks and investing the distributions in new shares is a proven strategy.

David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Canadian National Railway. Fool contributor Andrew Walker has no position in any stock mentioned. Canadian National Railway is a recommendation of Stock Advisor Canada.

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