Did you know you can be a millionaire without worrying about taxes? Most high-income earners see taxes taking out a sizeable chunk of their earnings. Logically, tax planning and investment planning go hand in hand. If you are investing for long-term capital appreciation, a Tax-Free Savings Account (TFSA) is the ideal choice.
Here are some TFSA hacks that can make you a millionaire.
Invest in high-growth stocks
While your TFSA contribution comes from the taxable income, the key benefit is the tax-free growth of investments. This tax-free growth could compound your returns significantly through high-growth stocks. As the investment income is tax-free, you can reinvest profits from selling the stocks to buy more stocks.
The CRA has kept the 2024 TFSA limit at $7,000. You could diversify your investment across high-growth and high-yield dividend stocks. If the growth stocks in your watchlist are at their all-time high, you could invest that money in less-volatile dividend stocks till a market correction comes.
For instance, Slate Grocery REIT (TSX: SGR.UN) stock is trading at a discount that has elevated its yield to over 10%. The monthly dividend you receive can be used to buy high-growth stocks like Hive Digital Technologies at $4 per share or Blackberry. Slate Grocery has a resilient business of earning rent from grocers. Its distributions are relatively safe and the REIT could continue giving distributions for years.
If you are risk-averse, you could invest $5,000 in Slate Grocery REIT and earn a monthly dividend of $42. You could reinvest this money to buy 10 shares of Hive. Whichever month Hive and BlackBerry trade below $4, you could invest in them and build a sizeable share count. Since the REIT is already trading near its low, the risk of downside is limited. Any capital appreciation from Hive or BlackBerry would add to your investment income.
Avoid withdrawing frequently from the TFSA
The TFSA contributions up to the prescribed limit are tax-free. Once you withdraw any amount tax-free from the TFSA, you cannot add it back to your contribution room. The longer you stay invested, the better returns you could get.
Hence, avoid making TFSA withdrawals, especially if your taxable income is not high. Instead, use an RRSP. Even though it may deduct 20 to 30% tax on withdrawal (depending on your tax bracket), you won’t lose the opportunity to convert that withdrawal into a 10 times tax-free return.
For instance, if you bought four shares of Constellation Software for around $4,500 in March 2019, they are now worth around $15,000. And if you stay invested in this long-term resilient growth stock for another five years, your money could grow beyond $32,000. If you withdraw this $15,000 from your TFSA now, you lose the opportunity to earn $17,000.
Had you withdrawn this $15,000 from your RRSP, you would have received $12,000 after deducting the $3,000 withholding tax. Avoid TFSA withdrawals unless necessary. The TFSA contribution room is limited, so use it wisely.
Make the most of the TFSA’s tax-free withdrawals
One benefit that sets the TFSA apart from other registered savings accounts is the ability to withdrawal anytime for anything. In other accounts, you can only make a tax-free withdrawal up to a limit and for specific uses like home buying or higher education. But the TFSA allows you to withdraw all the amount in your TFSA partially or in one go at any time tax-free.
You should plan your TFSA withdrawals smartly. Suppose you purchased 580 AMD shares at US$10.34/share in late 2016 with a US$6,000 investment. That $6,000 would be US$102,660 today.
If your financial goal is to go on an international vacation, you could withdraw some of the money from the TFSA. Whereas other registered accounts don’t give any benefits on withdrawal for vacation. Nor are there any tax benefits on personal holidays. Using tax-free money for such an expense will not eat up other benefits.
