The Tax-Free Savings Account, or TFSA, is a popular registered account among Canadians. Launched in 2009, it offers more flexibility than the RRSP (Registered Retirement Savings Plan). A StatsCan report states that the number of Canadian families contributing to the TFSA has increased from 20% to 39.4% in the last 15 years, while 52% of Canadians have a TFSA right now.
Most Canadians know that the TFSA is tax-sheltered, which means any gains generated in the account are exempt from taxes. However, a sizeable number of residents use the TFSA as a savings account even though you can hold stocks, mutual funds, and exchange-traded funds here.
As returns on qualified investments are tax-free, let’s see how investors can use the TFSA to retire with $1 million.
The average TFSA balance is around $40,000
According to a Bank of Montreal report, the average TFSA balance was around $40,000 at the end of 2023. Moreover, the annual TFSA contribution limit in 2024 was increased to $7,000 from $6,500 in 2023.
Canadians who lack the expertise to pick individual stocks should consider allocating a significant portion of their savings toward low-cost passive funds that track the S&P 500 index. In the last six decades, the S&P 500 index has returned shareholders 10% annually if we adjust for dividend reinvestments. So, a $40,000 investment in the S&P 500 index may balloon to $225,000 in the next 20 years.
Further, if the annual TFSA contribution limit is maintained at $7,000, monthly contributions will be closer to $600. Now, if you invest $600 every month and generate an annual return of 14% by investing in individual stocks, your cumulative investments would be close to $789,000 at the end of the next two decades.
It means your TFSA will surpass the $1 million milestone if you are disciplined and have a long-term horizon to benefit from the power of compounding.
Invest in growth stocks such as Celestica
Investing in individual stocks can be quite tricky as you need to consistently identify companies trading at reasonable valuations and a widening earnings base. One such TSX stock is Celestica (TSX:CLS), which has already returned close to 500% since August 2014.
Valued at $8.3 billion by market cap, Celestica provides enterprises with a wide range of supply chain solutions. It increased sales by 23% year over year to US$2.39 billion, and a focus on cost efficiency allowed Celestica to widen its operating margin from 5.5% to 6.3% in the last 12 months.
Celestica’s strong performance in the second quarter meant the company raised its revenue outlook to US$9.45 billion in 2023, higher than its previous forecast of US$9.1 billion. It also expects to report an operating margin of 6.3% and earnings per share of US$3.62, up from an earlier forecast of 6.1% and US$3.30 respectively.
Priced at 14.5 times forward earnings, CLS stock is quite cheap. Out of the five analysts tracking the TSX stock, one recommends a “buy,” and four recommend a “hold.” The average target price for CLS stock is $75, indicating an upside potential of 10% from current levels.
