Recently, the 2021 Tax-Free Savings Account (TFSA) contribution limit was announced. As expected, it was $6,000. That means that next year you’ll get an extra $6,000 worth of account space to hold investments in tax-free. While $6,000 might not look like a lot of money at first, looks can be deceiving. If you consider its potential to grow, $6,000 is a lot.
With that in mind, here are two methods with which you can turn a $6,000 TFSA contribution into $60,000.
Slow and steady
The slow and steady method is where you buy defensive stocks and hold on for the long term.
What you want to do here is buy “modest growth” stocks like Toronto-Dominion Bank (TSX:TD)(NYSE:TD), and hold on a long time. The goal is to earn a modest annual total return of about 10%, but hold long enough for that to turn into 1,000%. At a 10% annualized rate, that takes about 24 years. For most people, that’s a little less than the span of a career (30-35 years).
With TD, if everything goes right, 10% annualized could be quite do-able. TD yields 4.5% at today’s prices, so you only need 5.5% in annual capital gains to get to a 10% total return. And remember to re-invest the dividends! Income needs to be re-invested in order to compound.
Fast but risky
Next up, we have the fast but risky method.
This is where you buy high growth stocks like Lightspeed POS Inc (TSX:LSPD)(NYSE:LSPD) and hope to beat the market. Lightspeed POS shares were up 68% in 2020 as of this writing. It would only take four and a half years to get a 1,000% return at 68% annualized. Lightspeed may even beat 68% by the time 2020 is over, as we still have a month to go.
But it’s not a sure thing. Any stock that delivers above average gains also has above average risk of loss. If you bought LSPD stock on February 4 and sold it on March 20, you’d have realized a 69% loss. That’s much worse than TSX in the same period. Of course, the stock later recovered and then some. But you never know when a formerly bullish growth stock will go down and stay down.
As I’ve shown in this article, $6,000 can go a long way. Whether you invest in defensive stocks or growth stocks, you can realize a 1,000% return and grow your initial deposit into $60,000. It’s all a matter of how long a time frame you have ahead of you. If you take the slow and steady route, you can turn $6,000 into $60,000 in an investing lifetime.
If you go the fast and risky route, you might pull it off in just a few years. Whichever path you choose to walk, one thing is certain: money in a TFSA is best spent on investments. It’s not until you put your money in the markets that you realize your TFSA’s immense tax benefits.
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Fool contributor Andrew Button owns shares of TORONTO-DOMINION BANK. The Motley Fool owns shares of Lightspeed POS Inc.