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How to Maximize Your $6,000 TFSA Contribution

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TFSAs are simply the best way to save money. Whether you’re saving for retirement or an upcoming vacation, this should be your vehicle of choice.

The chief advantage is that your money is shielded from taxes forever. As long as your money stays in the account, you’ll never pay some of your capital gains or dividend earnings to the government.

TFSA withdrawals can occur at any time for any reason. That’s why it’s such a flexible savings vehicle, suitable for any time horizon.

Of course, there are limitations. The government places an annual maximum for contributions, meaning you can only shield a limited amount of capital per year from taxes. In 2020, that limit is set at $6,000.

A $6,000 contribution limit may seem onerous, but it’s still high enough to generate millions of dollars in long-term wealth. Plus, there are ways you can get around the annual limit.

If you want to maximize your $6,000 TFSA contribution, follow the two rules below.

Know your limit

Far too many people believe that you can’t contribute past the annual limit. But that’s not true! In reality, unused contribution from past years rolls forward, so you may have a higher limit than you realize.

Every Canadian resident begins to accrue TFSA contribution space the year that they turn 18. If you turn 18 this year, the maximum you can contribute is $6,000.

In 2019, the contribution was also set at $6,000. If you turned 18 last year and never contributed to your TFSA, that $6,000 figure would be added to this year’s sum. In reality, your personal annual limit this year would be $12,000.

The TFSA was first introduced in 2009. If you add every annual limit together, you’ll get $69,500. So, if you turned 18 on or before 2009, you could immediately contribute that entire sum, even though that far exceeds this year’s particular maximum.

Optimize your tax-advantaged account by making sure you contribute as much as possible. That requires knowing your personal contribution maximum, not just the annual limit.

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Automate your TFSA

The best investing trick of all time is to automate your contributions. This is a game changer.

Let’s say you want to invest $6,000 per year. That breaks down to $500 per month. If you contribute monthly, instead of all at once at the end of the year, you can take advantage of dollar cost averaging.

Buying every month makes sure you take advantage of market dips. For example, you would have bought at market lows when the COVID-19 panic hit in March.

But don’t trust yourself to buy every month. Instead, trust a computer.

Nearly every TFSA has an automated contribution setting. You can have it automatically withdraw money from your savings account on a regular basis. Then you can invest that sum regularly in whatever you wish, whether it be dividend stocks like Enbridge or growth stocks like Constellation Software.

Whichever stocks you choose, make sure that you’re putting as much money to work as possible. That’s what automated contributions do. Once they’re in motion, you’ll never miss a payment, even if you forget entirely.

The stocks below are perfect for TFSA holders.

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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 and Enbridge. Fool contributor Ryan Vanzo has no position in any stocks mentioned.

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