There’s no question that the Tax-Free Savings Account (TFSA) is an excellent choice for a short-term savings goal. The ability to make tax-free withdrawals is what makes this savings account a great short-term savings vehicle. However, long-term investors should not neglect their TFSA.
Not only does a TFSA allow tax-free withdrawals, but perhaps even more importantly, investment returns can also compound tax-free. That’s why a TFSA has the potential to be a significant contributor to your retirement savings.
The drawback of the TFSA is the annual contribution limit. In comparison to an RRSP, the annual contribution limits of the TFSA are much lower. As a result, it’s not likely that a TFSA could fund your entire retirement. That being said, with time and patience, there’s no reason why a TFSA couldn’t find a large portion of your retirement.
The annual contribution limit for the TFSA in 2024 is $7,000.
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TFSA investing
When it comes to maximizing returns in a TFSA, you’ll need to find an investment with growth potential. In addition to that, you’ll need time in front of you to hold that investment, to allow it to grow and compound. Once you’ve got that sorted out, the magic of compound interest will handle the rest.
As an example, let’s look at two scenarios where the rate of return varies in each example. If you were to invest $5,000 a year at an average annual return of 2%, you’d have just over $200,000 in 30 years. If your average annual return rate were 8%, you’d instead have more than $500,000.
And as long as that $500,000 were to remain inside the TFSA, you can withdraw the entire amount completely tax-free, which would not be the case if that $500,000 was sitting in a Registered Retirement Savings Plan (RRSP).
With that in mind, I’ve reviewed two Canadian stocks with winning track records. Both companies have a history of delivering far more than 8% annually.
Constellation Software
At a price tag that’s nearing $4,000, TFSA investors won’t be able to own many shares of this tech stock. However, what matters most is the amount of money you have invested in a stock rather than the number of shares you own.
Constellation Software (TSX: CSU) is one of the few tech stocks trading near all-time highs. Don’t let that keep you on the sidelines, though. This growth stock does not go on sale often.
Shares are up a market-beating 200% over the past five years. And that’s even with the company being valued at a massive market cap of nearly $80 billion.
goeasy
At a market cap of only $3 billion, goeasy (TSX: GSY) is a much more under-the-radar stock than Constellation Software. It’s also trading at a discount that’s looking like it won’t be around for much longer.
Shares of the consumer-facing financial services provider are down 20% from all-time highs. Still, the stock is up a market-crushing 250% over the past five years.
Despite goeasy’s small market cap, the growth stock has been outperforming the market’s returns for the past two decades.
Don’t sleep on this high-growth stock.
