Do You Have $5,000 to Invest in Your TFSA?: Here’s How to Turn it Into $150,000

The TFSA is a great tool to put cash aside for retirement. Here’s how investors can use the TFSA to build significant retirement wealth.

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

Image source: Getty Images

The Tax Free Savings Account (TFSA) is a useful investing tool to help young Canadians build a substantial savings fund.

How to invest in a TFSA

Canada created the TFSA in 2009 to provide residents with a new savings alternative. Contribution limits increase each year and currently stand at a maximum of $59,500.

People use several approaches to put cash aside for the future, including taxable accounts, RRSPs, and TFSAs. Advisors often recommend using taxable accounts once RRSP and TFSA contributions limits are exhausted.

The RRSP remains very popular and is particularly useful when a person is in a higher marginal tax bracket than they expect to be in retirement. RRSP contributions reduce taxable income in the respective year. Inside the RRSP, the funds grow without being taxed. However, the CRA taxes the money when it is withdrawn.

Investors make TFSA contributions with after-tax income. Investments inside the TFSA grow tax-free and no tax is paid to the CRA when you remove the profits. Young investors who still have their highest-income years ahead of them might want to use the TFSA space first and save RRSP room for when they earn more money.

In addition, the TFSA benefits retirees. The CRA does not include TFSA earnings when determining OAS clawbacks.

Top TFSA stocks

The top stocks to owns over the long haul tend to be market leaders. They generate solid profits regardless of the economic environment and pay reliable dividends.

Savvy investors use the dividends to buy more shares, setting off a powerful compounding process that makes some people rich. Let’s take a look at two stocks that demonstrate how this works.

Canadian National Railway

Canadian National Railway (TSX:CNR)(NYSE:CNI) is the only rail operator in North America with access to ports on three coasts. The lines serve as the backbone of the Canadian and U.S. economies, carrying everything from coal and crude oil to grains, cars, forestry products, and finished consumer goods.

The stock tends to hold up well when the broader market crashes, making it a sleep-easy TFSA investment. For example, CN trades higher now than it did before the pandemic.

A $5,000 investment in CN just 20 years ago would be worth $135,000 today with the dividends reinvested.

Royal Bank of Canada

Royal Bank (TSX:RY)(NYSE:RY) is Canada’s largest financial institution. Earnings took a hit in the first half of 2020 due to the pandemic, but Royal Bank remains very profitable and has the capital to ride out the recession.

The bank gets revenue from several divisions, including personal banking, commercial banking, capital markets, and insurance. This helps balance the revenue stream in challenging times. Royal Bank has the firepower to make strategic acquisitions. The bank also invests heavily in digital platforms.

Buying Royal Bank stock on dips tends to be a smart move over the long term. A $5,000 investment in Royal Bank 25 years ago would be worth $150,000 today with the dividends reinvested.

Royal Bank stock for TFSA

Royal Bank survived every major financial and geopolitical crisis in the past 100 years. The stock now trades near $93 compared to $103 at the start of the year.

The bottom line for TFSA investing

Canadians can use their TFSA to turn small initial investments into significant savings for retirement. The strategy requires patience and discipline, but the payoff can be enormous.

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.

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

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »