Have You Exceeded Your TFSA Limit? Here’s How a Down Market Can Help You

The market downturn has created buying opportunities, but what if you’ve exceeded your TFSA limit? Here’s how to buy in the downturn.

| More on:
IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT

Image source: Getty Images

Did you get a call from the Canada Revenue Agency (CRA) stating that you have exceeded your Tax-Free Savings Account (TFSA) limit? But the bear market has created a Black Friday sale in value and growth stocks you’ve always wanted to buy. Is there a way you can buy those stocks through your TFSA without exceeding the limit and inviting a 1% tax? 

How to invest in a TFSA even after exceeding the limit 

On January 1 each year, your TFSA annual limit renews. Additionally, your cumulative TFSA contributions for the years you have lived in Canada after 18 years of age affects your lifetime limit. This limit stops you from investing more of your working income tax free. But you can still find room for those coveted stocks. You can sell some TFSA stocks with weak fundamentals and limited upside and buy growth stocks. 

Hold stocks with long-term growth and value and exit stocks with limited growth potential. You will face a loss, but a good stock can recoup your loss and give better returns, without attracting the 1% tax. 

How your TFSA can make the most of the market downturn 

It’s time to revisit your portfolio. I am bearish on the oil sector even though it is the buzz of the world and trading near its 52-weeks high. Canadian oil stocks have garnered attention since the Russia-Ukraine war broke out and Europe and America banned Russian oil and gas. The oil price peaked at US$127/barrel in June. Such a price is unsustainable as oil is a commodity every nation needs but many do not have the natural reserves. Thus, governments use diplomatic ways and policy-level changes to control oil prices.

In the face of world politics, oil companies don’t have much power to control oil prices. Thus, they stick to reducing production costs to sustain profits. Canadian oil companies have a high cost per barrel compared with Saudi Arabia, Iran, and Russia. If these countries increase their oil supply, they can pull down oil prices.

Canada’s Cenovus Energy (TSX:CVE)(NYSE:CVE) can sustain its profits and dividends as long as oil trades at US$45/barrel. The trick to trade in this cyclical stock is to sell it in the upcycle because it has a limited upside linked to the oil price.

The stock surged 90% to above $30/share between January 1 and June 7, when the oil price peaked at US$127. Until the oil price crosses US$127, Cenovus stock price is unlikely to reach $30/share. If you own this stock, you can sell 50-60% of your holdings while it trades above $25 as the stock price has reached its upside. 

TFSA stock to buy on the dip 

Use the sales proceeds to buy BCE (TSX:BCE)(NYSE:BCE) stock, which hit its 52-week low in mid-October. BCE has a bright future as it nears the end of its three-year 5G infrastructure capital acceleration program. The fifth-generation technology opens the gates to autonomous driving and artificial intelligence (AI) at the edge. The 5G technology will connect millions of devices to high-speed, low latency internet that can perform mission-critical applications like driving. BCE has a competitive edge over Rogers Communications, struggling with network outages and a merger with Shaw Communications

BCE stock is down 20% from its 52-week high, and it can make a new high as 5G subscriptions grow. Moreover, the company increases its dividends at an average annual rate of 5%. If you invest now, you can lock in a 6.2% dividend yield, 5% dividend growth, and a 20% capital appreciation. 

How this trade-off looks in dollar terms 

If you invested $2,000 in Cenovus stock (122 shares) at the start of the year, your investment is now $3,160. You can sell 62 Cenovus shares (at $25.9) worth $1,600 and invest in BCE. This investment will give you an annual dividend of $100 that could grow by $5 annually and a $320 capital appreciation when the economy recovers.

If Cenovus’ stock price peaks at $30, you still have 60 shares to sell and book profit. But if the stock slides never to reach a $25 price again, you have booked your profit in Cenovus and secured a position in the fundamentally strong BCE. 

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 Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends ROGERS COMMUNICATIONS INC. CL B NV. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Dividend Stocks

This 8% Dividend Stock Pays Cash Every Month

Earn monthly cash of $154 with this 8% dividend stock.

Read more »

oil tank at night
Dividend Stocks

Think Oil Is Going Higher? 3 Dividend Stocks to Buy Now

Looking for steady dividend growth? These three Canadian oil stocks could provide substantial dividend income in the coming years.

Read more »

Profit dial turned up to maximum
Dividend Stocks

This 7% Dividend Stock on the TSX is Worth Watching

With this superb TSX stock now trading at the bottom of its 52-week range, it's certainly a dividend stock you'll…

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

2 TSX Dividend Stocks to Buy While They Still Offer Great Yields

These top dividend-growth stocks now offer 7% dividend yields.

Read more »

Dots over the earth connecting the world
Dividend Stocks

1 Magnificent Dividend Stock Down 23% to Buy Right Now Near a Once-in-a-Decade Valuation

Patient investors could be happy with this dividend stock a few years down the road.

Read more »

Human Hand Placing A Coin On Increasing Coin Stacks In Front Of House
Dividend Stocks

Best Stocks to Buy in May 2024: TSX Real Estate Sector

Besides yielding stable monthly passive income, these top TSX real estate stocks could help you earn high returns on your…

Read more »

exchange-traded funds
Dividend Stocks

These 2 Dividend ETFs Are a Retiree’s Best Friend

Retirees looking for steady income will love these two Canadian dividend ETFs

Read more »

Bad apple with good apples
Dividend Stocks

Safe and Sound Stocks for Canadians: My Top 5 Choices

Want some of the best stocks for Canadians right now? Here's my top 5 list of stocks to buy today…

Read more »