TFSA Limit Increase for 2021: Get $6,000 Ready

Invest in the Hydro One Ltd. stock to maximize the use of the additional contribution room in your TFSA after the 2021 update.

| More on:
stock data

Image source: Getty Images

The Canada Revenue Agency (CRA) has finally revealed the Tax-Free Savings Account (TFSA) limit update for 2020. With the $6,000 update, the cumulative contribution limit to TFSAs has increased to $75,500.

Today I will discuss the importance of fully utilizing your TFSA in helping you achieve long-term financial security and a stock you can consider to benefit from the account.

Why invest in a TFSA?

CRA introduced the TFSA in 2009 to encourage Canadians to save more money. While the TFSA is called a savings account, it has several advantages that make it more than merely a way to save more money. The greater you can save, the more you can invest in companies. Additional investment in companies can fuel Canada’s economic growth and improve the overall economy.

The most significant advantage of a TFSA is its ability to grow earnings on your investment free of tax. While you can hold cash in the account, the best way to use this tax-free investment vehicle is through income-generating assets. Any capital growth, interest, and dividend income in your account can grow tax-free provided that you avoid making TFSA mistakes.

You can withdraw from your TFSA without incurring any early withdrawal charges or tax penalties. Staying invested can help you continue generating more tax-free passive income in the account. However, if you need extra money, you can easily withdraw from your account to meet your expenses.

Leverage the 2021 TFSA limit

With the $6,000 update for the TFSA in 2021, it is time to consider how you can take advantage of the increased contribution room. Setting up regular deposits to your TFSA is an excellent way to benefit from your TFSA. While you might be tempted to store your cash inside the account, I would advise investing the dollar amount in a reliable dividend stock like Hydro One Ltd. (TSX:H).

Hydro One is a power transmission and distribution company with 30,000 circuit kilometers of high-voltage transmission lines and 123,000 circuit kilometers of distribution lines. The company provides its power transmission and distribution services to more than 1.4 million customers. Almost all of its income is through rate-regulated assets, making Hydro One’s revenue predictable and virtually guaranteed.

Hydro One recently announced its Q3 2020 earnings report with several positive takeaways. The company made $500 million in capital investment during the quarter while placing $371 million worth of assets into service. The company’s revenue grew by 19.5% due to higher transmission and distribution revenue.

Hydro One also has access to credit facilities of $3.5 billion, making its liquidity quite attractive. The company has plans to expand its rate base to $26 billion by 2024 from $21.7 billion in 2020. The higher rate base could mean a phenomenal boost in its cash flows and earnings.

Foolish takeaway

The $6,000 can be worth much more in the future if you use the contribution room to invest in an income-generating asset like Hydro One. The stock is trading for $30.30 per share and provides its investors with a juicy 3.53% dividend yield at writing.

This stock could be an ideal addition to your TFSA portfolio. It can provide you with substantial long-term growth through its capital gains and provide you consistent, and tax-free cash flows through its reliable dividend payouts.

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 Adam Othman has no position in any of the stocks mentioned.

More on Dividend Stocks

grow money, wealth build
Dividend Stocks

1 Top Dividend Stock That Can Handle Any Kind of Market (Even Corrections)

While most dividend aristocrats can maintain their payouts during weak markets, very few can maintain a healthy valuation or bounce…

Read more »

Red siren flashing
Dividend Stocks

Income Alert: These Stocks Just Raised Their Dividends

Three established dividend-payers from different sectors are compelling investment opportunities for income-focused investors.

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

3 Top Canadian Dividend Stocks to Buy Under $50

Top TSX dividend stocks are now on sale.

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Dividend Stocks

Index Funds or Stocks: Which is the Better Investment?

Index funds can provide a great long-term option with a diverse range of investments, but stocks can create higher growth.…

Read more »

A stock price graph showing declines
Dividend Stocks

1 Dividend Stock Down 37% to Buy Right Now

This dividend stock is down 37% even after it grew dividends by 7%. You can lock in a 6.95% yield…

Read more »

ETF chart stocks
Dividend Stocks

Invest $500 Each Month to Create a Passive Income of $266 in 2024

Regular monthly investments of $500 in the iShares Core MSCI Canadian Quality Dividend Index ETF (TSX:XDIV), starting right now in…

Read more »

edit Sale sign, value, discount
Dividend Stocks

2 Top Canadian Stocks Are Bargains Today

Discounted stocks in a recovering or bullish market are even more appealing because their recovery-fueled growth is usually just a…

Read more »

Hand writing Time for Action concept with red marker on transparent wipe board.
Dividend Stocks

TFSA Investors: Don’t Sleep on These 2 Dividend Bargains

Sleep Country Canada Holdings (TSX:ZZZ) stock and another dividend play in retail are looking deep with value.

Read more »