Have you ever wanted to be a tax-free savings account (TFSA) millionaire?
It’s not the easiest thing to do, but some have done it. Through a combination of diligent saving and prudent investing, some Canadians have managed to achieve multi-million dollar TFSA balances. That’s quite the feat, as the absolute maximum amount of TFSA contribution room a person can have accumulated in 2024 is $95,000. That’s the amount you’d be able to invest if you were born in 1991 and hadn’t made any TFSA contributions prior to today.
It takes a 952% return to turn $95,000 into $1 million. That’s certainly an above-average return starting from 2009, the year when the TFSA was invented. Nevertheless, it can be done. For example, a Toronto massage therapist was recently chronicled in the Globe Report on Business for having achieved a $1.8 million TFSA balance. In this article, I will explore several secrets of TFSA millionaires, and attempt to determine whether their success can be replicated.
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Secret #1: Hold dividend stocks and bonds in your TFSA
One key to making a lot of money in your TFSA is to hold the right assets in it. If a stock doesn’t pay a dividend then you might be better off holding it in a taxable account, as you don’t pay taxes on such stocks until you sell. If you plan on holding them for life, you may never pay taxes on them at all!
With dividend stocks and interest-bearing bonds, it’s a completely different story. Such assets pay out cash income on a regular basis whether investors like it or not. Such income is taxable as soon as it is paid out. So, it’s worth sheltering your dividend stocks and bonds inside a TFSA – especially bonds, because they have the worst tax treatment out of all asset classes.
Secret #2: Avoid over-contributing
Another secret of TFSA millionaires is keeping contributions within the limit. Your TFSA contribution limit is the sum of all the contribution room added in each year since you turned 18 (inclusive), minus amounts you already contributed. If you contribute more than your limit, you face a 1% monthly tax on the excess contributions, even if they are held in cash. In addition, amounts in excess of your contribution limit are taxable when they pay you dividends or capital gains.
So, contribute within your limit. You’ll ultimately reach a higher TFSA balance that way.
Secret #3: Play the long game
A final secret of TFSA millionaires – well, those TFSA millionaires who actually keep their wealth – is to invest for the long term. Some people achieve million-dollar TFSA balances by day trading – they usually end up getting taxed. In the CRA’s eyes, day trading full time is a business, not an investment.
So, what should you do instead of day trading?
Invest long term in “compounder” stocks that grow your wealth slowly over time.
Consider Alimentation Couche-Tard (TSX:ATD), for example. It’s a Canadian gas station company, best known as the owner of Circle K. ATD stock has increased about 2,000% in price since 2010. That means that, if you’d held a $100,000 position in the stock at the start of 2010 until today, you’d be sitting on a $2,010,000 position!
Now, this point is somewhat academic, because nobody actually had $100,000 in TFSA contribution room in 2010. Also, ATD is a much bigger company now than it was in 2010, which makes repeating its past performance difficult. Nevertheless, the company goes to show what can happen when you hold quality stocks long term. There is truly no need to day trade or do anything else that would compromise your TFSA.
