The Canada Revenue Agency (CRA) should be announcing the new Tax-Free Savings Account (TFSA) limit in 2021 next month. Last year, the tax agency announced the 2020 limit on November 27, 2019. The starting limit in the inception year of 2009 was $5,000, then increased to $5,500 in 2013 and 2014.
In 2015, the annual contribution was $10,000 — the highest in TFSA’s 12-year history. From 2019 to 2020, the CRA pegged the limit at $6,000. For next year, TFSA users are guessing the limit will be the same. Before your journey to wealth, know the rules governing the TFSA for smooth sailing in 2021.
Accumulated limit in 2020
The CRA indexes future contribution limits to inflation. If you have never opened or contributed to a TFSA, the cumulative contribution room as of 2020 is $69,500. Assuming the 2021 limit is also $6,000, the accumulated total will increase to $75,500.
Popular investment vehicle
The TFSA is younger than the Registered Retirement Savings Plan (RRSP) but has overtaken its older sibling in popularity. Both are excellent investment vehicles, although the TFSA has better flexibility, especially for younger users.
Create passive income or build wealth
For new users, the TFSA contribution limits start accumulating when you turn 18 years old. You don’t need to declare your income to accumulate contribution room as you would in an RRSP. The TFSA is your perfect vehicle to create passive income or build wealth.
Money growth in a TFSA is tax-free, which means any income or earnings are tax-exempt. All withdrawals have zero tax, too. If you withdraw funds, you can re-contribute the next year. The TFSA sounds like a regular savings account, but it’s not. Bonds, GICs, mutual funds, and stocks are eligible investments you can hold in your TFSA.
Mainstay in a TFSA
If you’re excited about the coming TFSA limit, start your search for the right asset to own. Number one on my list in the fourth quarter of 2020 and 2021 is Canada’s largest telecommunications company. BCE (TSX:BCE)(NYSE:BCE) is ideal if you were to build a fortune from scratch.
The blue-chip stock pays a 6.02% dividend. An initial position of $6,000 will produce a tax-free income of $361.20. Assuming you’re allowed to invest the accumulated contribution room of $75,500, the tax-exempt earning should be $4,545.10. Don’t withdraw and let the balance compound for 10 years. The investment will swell to $135,464.33.
BCE is a no-brainer choice that you don’t need to deep dive into the financials. The nearly $50 billion company boasts of more than 22 million paying customers across Canada. It owns Bell LTE, the country’s national network. Add the network of data centres and retail outlets that help maintain its dominant position.
The most significant tailwind today for BCE is the ever-growing demand for data and communication infrastructure plus the potential robust income from the 5G network. Aside from the generous dividend, analysts forecast a 25% stock appreciation in the next 12 months.
It won’t be a long till the CRA announces the 2021 TFSA contribution limit. Since the countdown has begun, be ready to scoop a suitable investment like BCE. You can build a TFSA dividend portfolio next.
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.
Fool contributor Christopher Liew has no position in any of the stocks mentioned.