Whenever you start saving for retirement, you receive two major pieces of advice: save more, and save early. While they are both sound bits of advice, they miss one important part: save where? You have a choice among non-registered accounts, RRSP, and of course the newly established, TFSA.
TFSA is, without a doubt, one of the best accounts ever conceived for the purpose of growing your wealth. Its tax-free nature makes it the perfect vehicle to grow your wealth.
Many people believe that as its contribution is relatively smaller than an RRSP, it might not help you grow your wealth substantially, but that depends quite heavily how you are putting your TFSA money to work.
Just as a savings account
Many Canadians make the mistake of treating their Tax-Free Savings Account (TFSA) as just another savings account. And while it does offer some returns, it doesn’t really fulfill the potential that TFSA offers. Even then, with regular contributions, you can have a decent enough nest egg, thanks to the power of compounding.
Say you have a fully stocked TFSA right now and you are getting the best interest rates of 2.75%. If you keep contributing $6,000 per year to your TFSA, the yearly contribution limit, you will have about $431,000 in your TFSA in 30 years.
Compounding is simply harnessing the power of time. The earlier you start and the more regular you are with your contributions, the better your chances of growing your TFSA nest egg.
Tax-free substantial nest egg
A better way to use your TFSA funds is to invest in dividend or growth stocks. If you can find a stock that combines both, even better. Take Granite REIT (TSX:GRT.UN), for instance. It’s a dividend Aristocrat and has increased its payouts for three consecutive years. Currently, it’s paying monthly dividends of $0.242 per share, which translates to a decent yield of 3.83%.
But an even stronger point in Granite’s favour is its growth rate. The REIT has grown its market value by over 113% (dividend adjusted) in the past five years. This is a CAGR of 16.41%, the lowest among three, five, and 10-year CAGR.
If the company keeps growing like this and you use just half of your TFSA, $35,000, and half of your yearly contributions, $3,000, you could be sitting at $5,000,000 in 30 years.
While Granite’s dividend yield is not in keeping with the usual high yields that REITs offer, its growth is also very different. The company has a diversified portfolio, and its focus on industrial and logistics properties ensure regular cash flows.
Five million in completely tax-free income might seem too good to be true. And companies don’t always grow this consistently.
But if you choose your stocks wisely, diversify and let compounding do its magic, your chances of becoming a millionaire with just your TFSA are very high.
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Fool contributor Adam Othman has no position in any of the stocks mentioned.