5 Secrets of TFSA Millionaires

These lesser-known secrets can help you set up the perfect long-term portfolio and achieve a million-dollar TFSA!

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The Tax-Free Savings Account (TFSA) has been around for over a decade now. The TFSA came on the scene in 2009, and in that time has increased the contribution room time and time again. Now Canadians, who could open a TFSA in 2009, have access to $95,000 of contribution room if they’ve never contributed.

And the thing is, there are a few Canadians out there who may have turned that money into over a million dollars already. That’s with just a decade of investing! And these are some of the secret strategies they’ve used.

Invest early and often

Among the best strategies that millionaires with a TFSA are likely to use are to invest early, and invest often. This would likely mean attempting to max out every single year for the new contribution limit. That also would mean dividing it up throughout the year, rather than trying to put it all in at once.

Consistency is key, and can make it far easier to invest and reach those high levels sooner. It’s also less stressful. Imagine trying to put aside $95,000 this year. Instead, you could simply attempt to hit a $7,000 target this year. Much more doable.

Leverage dividends

Once they’ve put cash into the TFSA, another secret of those hitting millionaire status is to leverage tax-free dividends. This would involve investing in dividend stocks, and using those dividends to invest right back into the TFSA. This would mean you’re using more cash, but without going over your TFSA limit.

And the best part? You’re now getting tax-free compounding on returns. This strategy can significantly accelerate wealth accumulation. Especially if you’re holding high dividend paying stocks or exchange-traded funds.

Be tax efficient

Now leveraging dividends is great. But what’s also great is that they are tax efficient as well! Investors will want to place their cash as efficiently as possible, to take full advantage of the tax-free strategy. So a high-dividend stock placed in a TFSA may be perfect, while bonds generate taxable interest and should go elsewhere.

Take calculated risks

Millionaires often already have a lot of cash on hand, and this can allow them to take more risks than perhaps someone with less money. But money is money, and risk is risk. So taking calculated risks can be helpful for wealth generation.

Granted, long-term investing with a diversified portfolio will be the corner stone. However, astute investors might strategically use small stakes for higher-risk, higher-reward opportunities. So this might involve choosing an individual stock, or even simply sectors.

Yet when doing this, it’s also likely they have an end goal – a breaking point where they either get out while they can, or get out once they’ve achieved a certain amount. So make sure to have a goal when choosing this strategy.

Seek undervalued assets

Perhaps the best option? Investing in undervalued assets. These can certainly be included in the calculated risk taking, but not necessarily. You can look at a sector such as banking, for example, and it ticks a lot of the boxes.

Consider Royal Bank of Canada (TSX:RY). This stock has a long history of dividend and share growth. Yet during economic downturns, shares drop, as we’ve seen. Now that the company is showing signs of growth once more, even after muted earnings, it could be a good time to get in while it’s undervalued.

What’s more, you can leverage its dividend yield of 4.21% as of writing. And it still trades at just 12.5 times earnings, making it a valuable choice today. All together, this stock checks a lot of the millionaire-maker points. So it certainly belongs on your watchlist for the TFSA today.

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 Amy Legate-Wolfe has positions in Royal Bank of Canada. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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