TFSA: Can You Really Invest $95,000 Tax-Free?

You can, in fact, hold TSX stocks like Alimentation Couche-Tard Inc (TSX:ATD) tax-free in a TFSA. But can you hold $95,000 worth?

| More on:
Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks

Image source: Getty Images.

The Tax-Free Savings Account (TFSA) is one of the best investment environments available in Canada. Offering tax-free dividends and capital gains as well as tax-free withdrawals, the TFSA can really help you grow your wealth.

The benefits of tax-free dividends and gains are similar to those offered by Registered Retirement Savings Plans (tax-free compounding and higher after-tax returns), but TFSAs also give you the freedom to withdraw money without a tax penalty. These combined benefits make the TFSA ideally suited to relatively long-term investments that you aren’t fully committed to holding until retirement.

A big question that many Canadians ask about TFSAs is how much they can invest in them. The absolute maximum limit on a new account is $95,000; however, your individual circumstances determine whether you personally can contribute that much. In this article, I will explore the question of whether you can really contribute and invest $95,000 into a new TFSA.

It all depends on age and past contributions

Whether or not you can invest $95,000 into a new TFSA depends on A) your age and B) your past contributions.

Your TFSA contribution room is the room you’ve accumulated in all the years you’ve been eligible to open a TFSA. You don’t need to have already opened TFSA to accumulate contribution room, you’ll have all the room that a person your age is entitled to when you open your first one. There’s a set amount of TFSA room added each year — it’s the same for everyone — and you are entitled to all the room that has accumulated since you turned 18.

As for the $95,000 number specifically, you need to have turned 18 at some point in 1991 or earlier to have that amount. Otherwise you can find your personal amount of accumulated contribution room by signing in to CRA MyAccount.

How to get the most of your TFSA

Once you have a TFSA with a decent amount of money in it, the next thing to do is invest. Generally speaking, it’s better to hold stocks that pay dividends rather than those that don’t pay dividends in a TFSA because stocks without dividends aren’t taxed as frequently as dividend stocks. So, the tax-sheltering is more impactful in the latter case (unless you’re a short-term trader).

Alimentation Couche-Tard (TSX:ATD) is a good example. ATD is a dividend stock with a 0.9% yield. You might argue that the low yield is less than ideal to illustrate the point I’m trying to make here, but ATD is worth mentioning because of its overall quality.

With $95,000 fully invested in ATD in a taxable account, you’d get $867 per year in dividend income. The math on that is shown below.

COMPANYRECENT PRICENUMBER OF SHARESDIVIDENDTOTAL PAYOUTFREQUENCY
Alimentation Couche-Tard$76.671,240$0.175 per quarter ($0.70 per year)$217 per quarter ($868 per year)Quarterly
Alimentation Couche Tard.

Now, if you had a 50% marginal tax rate in Ontario, you’d pay $299 in taxes on the dividends received from those shares. The math on that is as follows:

  • Taxable amount with 38% gross-up: $1,198
  • 50% pre-credit tax: $599
  • 15% Federal dividend tax credit: $180
  • 10% Provincial dividend tax credit: $120
  • Taxes payable: $299

So, you’d pay $299 on your ATD dividends in a taxable account — assuming you lived in Ontario and had a 50% marginal rate, that is.

Regardless of what your tax rate or province was, you’d pay $0 on your ATD dividends in a TFSA. So, the TFSA beats even the mighty dividend tax credit when it comes to saving you money. Just contribute within your limit and avoid professional day trading, and the tax savings will be yours!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alimentation Couche-Tard. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Pile of Canadian dollar bills in various denominations
Dividend Stocks

How to Use Your TFSA to Earn $5,000 Per Year in Tax-Free Income

Are you looking for ways to earn $5,000 in TFSA passive income? Consider rebalancing your portfolio, shifting $20,000 to these…

Read more »

money cash dividends
Dividend Stocks

Dividend Powerhouses: Top Canadian Stocks to Enhance Your Portfolio

Three TSX dividend powerhouses are the top options for Canadians looking to enhance their investment portfolios.

Read more »

edit Person using calculator next to charts and graphs
Dividend Stocks

The Best Stocks to Invest $2,000 in Right Now

Do you have some extra cash to invest this month? Here are two value-priced dividend stocks to buy for a…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

TFSA Investors: 3 Stocks to Turbo-Charge Your Tax-Free Portfolio

The TFSA contribution room can be a significant constraint, and the most practical way to circumvent it is to choose…

Read more »

Cogs turning against each other
Dividend Stocks

Invest $15,000 in This Dividend Stock for $108.26 in Monthly Passive Income

Monthly passive income stocks can give you far more than annual returns, but dividend income that can be reinvested time…

Read more »

Business success with growing, rising charts and businessman in background
Dividend Stocks

RBC Stock’s Path to Doubling Your Investment: A Decade-Long Perspective

The Royal Bank of Canada (TSX:RY) or RBC stock has more than doubled investors' capital in 10 years and may…

Read more »

stock analysis
Dividend Stocks

3 Top Dividend Stocks Canadians Can Feel Confident Buying Aggressively

It’s essential to find the best Canadian dividend stocks to buy that you can have confidence in holding for the…

Read more »

Dividend Stocks

Use Your TFSA and Earn $67.20 in Passive Income Each Month

TFSA? Check. Monthly dividend stock? Check. Passive income now pouring in? Check all the boxes.

Read more »