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TFSA Investors: Become a Tax-Free Millionaire by 2030

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The best investment strategies are the ones with the longest time horizons. Warren Buffett took nearly six decades to reach his first billion, and hedge fund legend Jim Simmons took 44 years to figure out his trading strategy. In short, investing is like a marathon rather than a sprint. 

That being said, some goals are more approachable and quicker to achieve than you might imagine. Accumulating $1 million in your Tax-Free Savings Account (TFSA), for example, is something I believe most investors can achieve within this decade alone. Here’s how. 

Maximize your contribution room

As of January 1, 2020, the total cumulative contribution room for the TFSA is $69,500. Since any unused room can be carried forward in subsequent years, most investors over a certain age can take advantage of this extensive room for tax-free investments. 

Starting off with the maximum allocation of $69,500 is a critical first step if you hope to reach the million-dollar goal. It’s also equally important to maximize your contribution every single year for the next decade, at least. Taking full advantage of the Canadian Revenue Agency’s tax shelter is a critical step in becoming a millionaire quicker.   

Aim for ultra-high-growth companies

Being diligent about your TFSA contributions isn’t enough to make you a millionaire. Assuming you’ve maxed out your cumulative TFSA contributions by 2020 and the contribution room remains the same for the next decade ($6,000 every year), you’ll need a 28% compounded annual return to reach $1 million by 2030. 

To put that into context, the Canadian stock market delivered an average annual return of just 7% over the past decade. In other words, you’ll need to make concentrated bets on stocks that outperform the rest of the stock market by a hefty margin. 

While a 28% annual return is rare, it isn’t impossible. Shopify and Constellation Software delivered 75% and 31.9% annualized growth, respectively, over the past five years. Even some non-tech stocks have delivered stunning results over the past decade. Dollarama’s stock price has compounded at a rate of 30.5% since its listing on 2009. 

In other words, it’s perfectly reasonable to expect a high, double-digit growth rate for certain companies.

Spotting a hyper-growth stock

Admittedly, it’s impossible to predict a company’s growth rate precisely over time. However, hyper-growth companies with the capacity to exceed our 28% annual growth target usually have some common characteristics that can help you spot them early. 

For one, technology stocks with capital-light business models tend to have exceptional growth rates. Software-as-a-service companies or technology holding companies that grow through frequent acquisitions can easily deliver double-digit growth rates every year. 

Non-tech hyper-growth companies tend to have durable competitive advantages, pricing power, or staying power in an industry where supply far outstrips demand (such as oil or real estate).   

Bottom line

If you’re trying to accumulate $1 million in your TFSA by 2030, you need to max out your contribution room and invest aggressively in hyper-growth stocks. Try to maximize your tax-free allowance and aim for companies that are growing faster than 28% annually or have massive market opportunities ahead of them.  

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Constellation Software, Shopify, and Shopify. Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned.

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