What makes the Tax-Free Savings Account (TFSA) so great is its versatility. The account can be used for both short- and long-term goals. In addition, Canadians have a choice when it comes to the types of funds being kept within their TFSA.
In comparison to a Registered Retirement Savings Plan (RRSP), the TFSA would be the logical choice for any short-term savings goals. That’s because withdrawals from a TFSA are completely tax-free, which is not the case with the RRSP.
The reason why a TFSA can also be a great long-term savings account too is because capital gains and dividends are not taxed, meaning if you’ve got time on your side and are willing to invest in funds with either growth potential or the ability to generate passive income, the earnings possibilities are endless thanks to compound interest.
For those looking to maximize returns within a TFSA, the appropriate funds must be chosen. If there’s very minimal growth potential, the returns will understandably be limited, even with a long-term time horizon. To highlight that, let’s look at an example.
Using a TFSA for investing in stocks
For anyone aged 18 years or older in 2009, the maximum TFSA contribution room today is $88,000. If a maxed-out TFSA were to earn 1.5% annually, it would be worth approximately $125,000 in 25 years. However, if that $88,000 was instead earning 7% annually, that original investment would be worth just about $500,000 in 25 years.
In both examples, I’m not taking into consideration any additions during those 25 years. The difference of $375,000 between the two examples is strictly based on the average annual return.
Now, the question becomes how to maximize returns. Is it even possible to earn 7% consistently each year? Unfortunately, finding an investment that guarantees an annual return of 7% will not be easy to find. But to find an investment that has the potential to deliver 7% on average over a long period is very much possible.
Investing in stocks is one of the most dependable ways to earn a return of 7%, or higher, over the long term. I’ve reviewed one TSX stock that has a rich history of delivering far higher than that in recent years. And with shares currently trading at a discount, now could be a wise time to be loading up on shares.
goeasy (TSX:GSY) is a consumer-facing financial services provider. Unsurprisingly, demand has taken a hit in this high-interest-rate environment. That’s resulted in the stock selling off for most of the past 12 months.
Even with shares trading at a loss over the past year, though, goeasy is still up more than 150% over the past five years. That’s good enough for a compound annual growth rate (CAGR) of more than 20%.
Of course, not all stocks on the TSX have as impressive of a track record as goeasy. However, going back a decade and longer, it’s not hard to find companies surpassing a CAGR of 7%, just as goeasy has.
If you’re willing to be patient while interest rates drop, goeasy should be on your watch list. Long-term investors will be well rewarded in due time for taking advantage of this rare buying opportunity.