The Canada Revenue Agency (CRA) just announced the Tax-Free Savings Account (TFSA) limit for 2021 will be $6,000. Investors with some cash to contribute to the TFSA next year wonder where they should invest the funds.
TFSA 101
The Canadian government created the TFSA in 2009. Since then the TFSA limit increased each year and the cumulative space is now $69,500. The $6,000 limit increase in 2021 will bring the cumulative contribution space to $75,500. That’s significant room for Canadians to build attractive tax-free income portfolios and retirement funds.
All interest, dividends, and capital gains generated inside a TFSA remain beyond the reach of the Canada Revenue Agency. The TFSA provides great flexibility, allowing people to pull funds whenever required. The amount withdrawn gets added back to the TFSA limit space in the following calendar year.
Retirees can use the TFSA to create an income stream that won’t bump them into a higher tax bracket or put their OAS pension at risk of a clawback.
Younger investors can take advantage of the TFSA to save for a home purchase or to build a personal pension fund to complement RRSP savings as well as future CPP, OAS, and company pensions.
Where to invest the $6,000 TFSA limit in 2021
The stock market rally off the pandemic lows essentially wiped out most of the best deals on stocks. However, some sectors that really took a hit still appear oversold. Let’s take a look at two stocks that pay attractive distributions and could deliver big gains for TFSA investors in 2021.
TC Energy
TC Energy (TSX:TRP)(NYSE:TRP) is a leading player in the North American natural gas transmission sector. The company also has oil pipelines and power generation facilities.
The stock fell from $76 per share in February to below $50. A rebound has it back to $59 at the time of writing, but it still offers big upside opportunity for TFSA investors in 2021.
TC Energy is working through a large secured capital program that will drive revenue and cash flow growth in the coming years. the board intends to raise the dividend by 8-10% in 2021 and by 5-7% beyond that time frame. The current dividend provides a yield of 5.5%.
While oil pipelines face challenges, but the natural gas transmission segment should see solid growth for years. TC Energy is positioned well to capitalize on LNG growth and has a balanced revenue stream. Warren Buffet’s Berkshire Hathaway spent US$10 billion this year to acquire a natural gas transmission business, so the world’s most famous investor sees opportunity in the industry.
RioCan
RioCan (TSX:REI.UN) pays its distributions monthly, making it an attractive pick for a TFSA income fund.
RioCan currently trades close to $18 and provides a yield of nearly 8%. The distribution should be safe and investors could see the owner of shopping malls surge back toward $25 in the next couple of years. COVID vaccines should be widely available in Canada by the second half of 2021. This will help RioCan’s tenants get back on their feet as people feel comfortable moving back to malls to do their shopping.
RioCan has a number of growth projects on the go that should boost revenue for years. These include the mixed-use sites that combine retail and residential units.
The bottom line on investing the 2021 TFSA limit
Investors searching for opportunities to invest the 2021 TFSA limit should put TC Energy and RioCan on their radars. The companies provide attractive payouts and have decent upside potential as the economy recovers.
