Can a Tax-Free Savings Account (TFSA) investor realize a $1,000,000 balance in the one-of-a-kind account by age 45? The goal seems impossible but hypothetically possible if you are 25 years old and have an investment window of 20 years.
Likewise, selecting a blue-chip asset with a history of delivering astronomical returns is the key to achieving the objective. Apart from the investment choice, the TFSA user must have the financial discipline to save, invest, and keep reinvesting the dividends to benefit from the power of compounding.
Don’t take high-risk gambles
People say amassing a significant TFSA balance is a long shot that would require users to take high-risk gambles. However, you must not attempt to carry on a business or resort to day trading. The Canada Revenue Agency (CRA) prohibits such activity in a TFSA.
The tax agency conducts audits to check the frequency of transactions, ownership period, and speculative nature of the investment. If caught red-handed, it could be a costly mistake because the TFSA loses its tax-free status. The CRA will treat all earnings as business income, and therefore, subject to tax.
Less aggressive approach
Some investors have accumulated huge balances and are close to becoming TFSA millionaires using a less aggressive approach. The initial assumption is that you have $75,500 (total cumulative contribution room in 2021) available TFSA contribution room and expect an annualized return of 10%.
Then, invest the maximum yearly limits at the start of each for the next 20 years. Your balance could be 75% of your goal or close to $1 million. Remember, becoming a TFSA millionaire doesn’t happen overnight. It would help if you exercise patience and perseverance to succeed.
Long-term investing is a proven strategy to earn maximum returns at minimum risk. Canada’s Big Five banks are mature and blue-chip companies that have been paying dividends for more than a century. The Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) or Scotiabank currently pays a high 4.43% dividend.
Scotiabank’s dividend track record is 189 years, and for the last 20 years, the total return is 769.17% for an 11.4% compound annual growth rate (CAGR). Also, the bank stock’s total return in the last 48.23 years is 191,613.27% (16.93% CAGR). With its $98.59 billion market capitalization, Scotiabank is the country’s third-largest bank after the Royal Bank of Canada and Toronto-Dominion Bank.
The global bank will report its Q2 2021 earnings results on June 1, 2021. Analysts expect Scotiabank to report better earnings than Q1 fiscal 2021 (quarter ended January 31, 2021), where the bank posted a 3.1% increase in net income versus Q1 fiscal 2020.
Like in the first quarter, Scotiabank President and CEO Brian Porter is confident that all four business lines in the bank’s diversified business platform will continue their strong performances. Also, Scotiabank will have additional flexibility for capital deployment following the reduction in the provision for credit losses (PCL).
Don’t take any shortcuts when building a million-dollar TFSA. If used and managed correctly, $1 million is an achievable goal. Perhaps it might not take 20 years if you’re 25 years old today. However, you’ll get to your destination slowly but surely with a blue-chip asset as your core holding.
TFSA balances grow faster because money growth is tax-free. Since users can keep investing in the account past age 71, Scotiabank will also provide a sizeable passive income stream in retirement.
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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. The Motley Fool recommends BANK OF NOVA SCOTIA.