If your available Tax-Free Savings Account’s (TFSA) contribution room is over $70,000, you have an extravagant tax-saving benefit. With the Canada Revenue Agency’s (CRA) announcement of the new annual contribution limit for 2021, the TFSA accumulated contribution room will climb to $75,500 in the new year.
November has been the month of revelation for TFSA users since 2009. The CRA sets a contribution limit each year, and account holders save and earn money tax-free. If you have never opened a TFSA before, you can deposit a total of $75,500 in 2021.
Max out your limit if possible
Start the year right and strive to maximize your TFSA again. For Canadians who have yet to experience maintaining this registered investment account, you’re missing a lot. Besides cash, a user can hold bonds, ETFs, GICs, mutual funds, and stocks. If you want substantial tax-free gains, don’t make cash your primary investment.
You’re lucky if you’ve been maxing out your TFSA limit every year. Money growth is tax-free, so your balance can grow faster without the CRA coming into the picture. The account’s flexibility is super tremendous, too, because you can withdraw any amount, anytime, without incurring a tax penalty.
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The benefits outweigh the drawback
The “no barrier to withdrawals” is the major drawback of the TFSA. While it’s a salient feature, users can raid the account and withdraw funds at will. If you have the financial discipline and resist the temptation to touch the money, you can derive a host of benefits.
Tax-free compounding of money is the first benefit you’ll derive from your TFSA. There’s no drag in annual taxes whatsoever, and you can keep contributing as long as you want. The contribution room isn’t selective, too, because it’s the same regardless of income.
If you did not use up your limit in 2020, the unused contribution room would carry over to 2021. TFSA withdrawals won’t count as income and, therefore, will not affect your government benefits. Low-income seniors also get a reprieve from high clawback rates. The CRA will not tax your TFSA upon death.
A company that operates in a near-monopoly is an excellent investment prospect for TFSA users. North West Company (TSX:NWC) serves customers in geographically challenged regions and hard-to-reach communities. No wonder the consumer-defensive stock is holding up well in the pandemic and enjoying a 26% year-to-date gain.
The $1.62 billion company pays a 4.34% dividend. Your $6,000 TFSA contribution will produce $260.40 in tax-free income. If you’re new to the TFSA, and your available room is $75,500, the windfall is $3,276.70. The dividend earning is 100% tax-exempt. Note that North West’s payout ratio is on the low side (53.57%).
In Q3 2020 (quarter ended October 31, 2020), North West’s consolidated sales grew 6.4% to $553 million versus the same period in 2019. Likewise, the $35.9 million in net earnings were 44% better than Q3 2019.
The leading retailer of food and everyday products and services in far-flung areas is an excellent pick for 2021. Customers in the rural communities and urban neighbourhoods in Canada, Alaska, the South Pacific and the Caribbean are fortunate there’s a dedicated, community-minded enterprise providing their needs.
A TFSA is for a lifetime
Unlike the Registered Retirement Savings Plan (RRSP), there’s no mandatory closing of your TFSA. You can grow your money tax-free for your entire lifetime.
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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.