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.
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.
Speaking of ideal additions to your TFSA portfolio…
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Fool contributor Adam Othman has no position in any of the stocks mentioned.