TFSA Investors: Turn $69,500 Into $2 Million and Pay Zero Taxes to the CRA

TFSA investors who have a high risk appetite and a long-term horizon can consider growth stocks such as Constellation Brands for their portfolio.

| More on:
IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT

Image source: Getty Images

Canada has retirement benefits such as the Canada Pension Plan (CPP) and Old Age Security (OAS). While Canadians can rely on these payouts to fund their retirement, one drawback is the above income sources are taxed by the Canada Revenue Agency (CRA).

Further, you need to find alternate income sources, as just the retirement payouts will not be sufficient to lead a comfortable life for retirees.

The Tax-Free Savings Account (TFSA) is a flexible investment option for Canadians. As the name suggests, any withdrawals from the TFSA will be exempt from CRA taxes.

For 2020, the TFSA limit stands at $6,000, which means the maximum contribution limit for Canadians is $69,500.

Thus, if you want to invest $69,500, how do you ensure that it balloons to over a million dollars by retirement? For example, where should a 30-year-old who might retire at 60 allocate these funds?

For people with a long-term horizon, investing in equity markets is the best bet. The stock market has created massive wealth for long-term investors over the last many decades. TFSA investors can look to add growth stocks such as Constellation Software (TSX:CSU) to their portfolio.

Constellation Software stock has gained exponentially

Constellation Software is engaged in the development and customization of software. It acquires, manages, and builds vertical market software businesses. CSU looks to acquire companies with sustainable revenue growth and profit margins.

The company looks to acquire small businesses in the range of $5 million and $10 million. While most tech companies have historically focused on growth, CSU has given equal importance to the bottom line as well.

This business model has served the company well. The stock has gained over 3,300% in the last decade and close to 7,500% since its IPO back in 2006. A hypothetical investment of $69,500 in CSU back in March 2010 would therefore have been worth $2.29 million today.

High valuation metrics

CSU stock is trading at a forward price-to-earnings multiple of close to 33, which might seem expensive at first glance. However, the company is estimated to grow earnings by 18% in 2020 and 16.5% in 2021. Its return on assets stands at 10.1%, while return on equity is 43%.

In the next five years, analysts expect CSU to increase earnings at an annual rate of 19.2%. In the last five years, its earnings were up 16.8% annually and the stock gained 225% in this period.

CSU stock is currently trading 8% below its record high. While the stock movement will be volatile in the short term, the company has created significant wealth since its IPO. Another eye-catching observation is that CSU had managed to hold its own during the financial crisis of 2008.

While most indexes were down 50% in the market crash, CSU stock gained 9.4% in 2007, 4.5% in 2008 and 43% in 2009.

The verdict

Constellation Software has been a winning bet over the last decade and a bit. However, it’s not advisable to park all your funds in a single stock.

Investors need to diversify their portfolio and those with a high risk appetite and a long-term horizon can look to add similar growth stocks in their portfolio to help them retire early with more than a million dollars.

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.

The Motley Fool owns shares of and recommends Constellation Software. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

More on Tech Stocks

value for money
Tech Stocks

3 Tech Stocks Trading for a Significant Discount

These tech stocks have corrected quite a lot, despite the strength in their business, making them attractive long-term bets.

Read more »

Shopping and e-commerce
Tech Stocks

Shopify Stock: What Investors Should Do if it Falls to $300

Shopify (TSX:SHOP)(NYSE:SHOP) stock fell another 10% on Tuesday, as it nears the $300 range. So, what happens if that comes…

Read more »

consider the options
Tech Stocks

Will Enthusiast Gaming Stock Change Course After the Activist Attack?

Last week's cheer in Enthusiast Gaming stock is reversing this week.

Read more »

sale discount best price
Tech Stocks

Tech Selloff: 3 Bargains to Pick Up Now

Thanks to the current slump, you can buy many tech stocks at a discount price or valuation that's usually quite…

Read more »

TSX Today
Tech Stocks

TSX Today: What to Watch for in Stocks on Wednesday, May 25

Apart from bank earnings, TSX investors may want to keep an eye on the FOMC meeting minutes today.

Read more »

Wireless technology
Tech Stocks

3 Tech Stocks Worth Buying Today

Looking for tech stocks to add to your portfolio? Here are three top picks!

Read more »

Question marks in a pile
Tech Stocks

Should Canadians Be Worried About the Snapchat Stock Plunge?

Social media stocks lost US$180 billion in value on Tuesday, as shares of Snapchat (NYSE:SNAP) stock dropped by 41%, below…

Read more »

thinking
Tech Stocks

Is Lightspeed (TSX:LSPD) Still a Buy After its Huge Q4 Loss?

The e-commerce investments in Canada have taken a turn for the worst, which is either a signal to stay away…

Read more »