Last month, the CRA, or Canada Revenue Agency, announced the new annual limit for the Tax-Free Savings Account (TFSA) in 2024. The CRA raised the annual contribution limit for the popular registered account to $7,000 in 2024, up from $6,500 in 2022 and $6,000 in 2021.
Generally, the annual TFSA contribution room is indexed to inflation, forcing the CRA to raise these limits for two consecutive years. It also suggests the cumulative TFSA contribution limit will increase to $95,000 in 2024 for those who have been eligible to contribute to the account since 2009.
Enjoy tax-free returns in the TFSA
The TFSA can be used to hold several qualified investments ranging from stocks and bonds to mutual funds and exchange-traded funds. Any returns generated from these qualified investments in the form of interests, dividends, and capital gains are sheltered from CRA taxes.
So, where do you invest $7,000 in the TFSA next year? Well, it depends on several factors, such as your age and risk appetite.
Historically, equities as an asset class have enabled investors to outpace inflation over time, which is the primary goal of most individuals. It means you can choose to invest in exchange-traded funds (ETFs) such as iShares S&P/TSX Index (TSX:XIU), which offers you exposure to some of the largest companies in Canada.
Some of the top holdings of the XIU include Royal Bank of Canada, Shopify, Enbridge, Canadian National Railway, and Constellation Software.
As it holds a basket of stocks across sectors, ETFs, including XIU, offer investors diversification, which lowers overall risk. According to most experts low-cost ETFs will help you beat the majority of mutual funds returns over time.
Hold growth stocks such as Dollarama in the TFSA
Investors with a larger risk appetite can look to buy and hold quality growth stocks such as Dollarama (TSX:DOL). The discount retailer is fairly recession resistant, allowing it to generate cash flows across market cycles.
Despite a sluggish macro environment, Dollarama is forecast to increase revenue by 15.5% year over year to $5.84 billion in fiscal 2024 (ending in January) and by 8% to $6.3 billion in fiscal 2025. Comparatively, analysts expect adjusted earnings to increase from $2.76 per share in fiscal 2023 to $3.82 per share in fiscal 2025.
Priced at 26 times forward earnings, Dollarama stock is not too expensive, given its stellar growth estimates.
Dollarama’s robust growth in the past decade allows it to pay shareholders an annual dividend of $0.284 per share, indicating a yield of just 0.28%. However, these payouts have more than doubled in the last eight years.
The Foolish takeaway
Investing in the XIU index 10 years back would have returned close to 120% to investors in dividend-adjusted gains. It means a $5,000 investment in XIU in December 2013 would be worth roughly $11,000 today. Alternatively, a $2,000 investment in Dollaramastock would have ballooned to $14,650 in the last decade.
We can see a combination of ETFs and quality growth stocks can help you deliver market-beating returns over time, all of which will be exempt from taxes if the assets are held in the TFSA.
