When it comes to long-term investing, the Registered Retirement Savings Plan (RRSP) isn’t the only account to consider. While the annual contribution may be much lower, the Tax-Free Savings Account (TFSA) offers long-term investors plenty of benefits.
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Why should Canadians be maxing out their TFSA?
The TFSA is an excellent choice for short-term savings goals, mainly due to the ability to make cash-free withdrawals. In addition, Canadians have the option to own a variety of funds within their TFSAs, including stocks, Guaranteed Investment Certificates, and cash, to name a few examples.
A main reason why long-term investors would be interested in maxing out their TFSAs is because capital gains are not taxed. Meaning, your investments can compound year after year, completely tax-free. And whenever you’re ready to make a withdrawal, you don’t need to pay any tax at all.
The catch is that the TFSA does have annual contribution limits. In 2024, the limit is $7,000. However, unused contributions can be carried over from year to year. For anyone aged 18 years or older in 2009, their total TFSA contribution limit would be $95,000 today.
With a decent annual return and a few decades of compounding, a $95,000 investment certainly has the potential to grow into a sizable nest egg.
Owning stocks in a TFSA
If your goal is to maximize returns in a TFSA, you’ll need to own funds with growth potential. Stocks are a great option for doing exactly that. Fortunately, the TSX is loaded with top-quality stocks that own long-standing winning track records.
With that in mind, I’ve reviewed two companies that can provide a balanced mix of growth, passive income, and dependability.
Constellation Software
With a stock price that’s above $4,000, Canadians won’t be able to own many shares of this tech stock in their TFSA. However, it’s the amount of money invested that matters. Not the amount of shares you own.
Constellation Software (TSX: CSU) has been amongst the top-performing stocks on the TSX over the past couple of decades. Even as the company has grown to a massive market cap size of $85 billion, it hasn’t had any trouble outperforming the market’s returns in recent years.
Shares of Constellation Software are up more than 200% over the past five years. In comparison, the Canadian stock market has returned less than 50%.
If you’re in search of dependable growth potential, this is the stock for you.
Bank of Nova Scotia
TFSA investors who plan on owning high-growth companies like Constellation Software would be wise to consider balancing those holdings out.
One potential downside of growth stocks is the volatility. Market-beating growth potential comes at a price, which is why owning shares of a dependable dividend-payer like Bank of Nova Scotia (TSX: BNS) is a good idea.
Bank of Nova Scotia can provide a portfolio with a mix of defensiveness and passive income. While it might not be that exciting to own a slow-growing bank stock, it will help minimize the impact of volatility from your growth holdings.
A juicy dividend is another way to help offset inevitable volatility. At today’s stock price, Bank of Nova Scotia’s nearly 7% dividend yield ranks it as the highest among the Big Five.
