The latest data from the Canada Revenue Agency (CRA) paints a telling picture of how Canadians may be using their Tax-Free Savings Accounts (TFSAs). According to 2022 statistics, individuals in the 30 to 34 age group have an average TFSA balance of $13,822. Even more striking, their unused TFSA contribution room averages a staggering $59,110!
TFSA: An underused opportunity
The TFSA was introduced in 2009 as a way for Canadians to save and invest tax-free. By 2022, Canadians eligible since the program’s inception had accumulated a total contribution room of $81,500. Yet, those in the 30 to 34 age group were, on average, leaving nearly 73% of their available contribution room untouched. That’s a significant missed opportunity – both in terms of tax savings and potential for wealth-building.
As of 2024, the total available contribution room for Canadians who have never contributed to a TFSA stands at $95,000. But the question remains: why are so many Canadians not taking full advantage of this powerful financial tool?
Beyond savings: Smart uses for your TFSA
While many Canadians view their TFSA as just a place to save, it can be so much more. In fact, it’s an excellent vehicle for growing wealth, especially if you look beyond traditional low-interest savings options.
One of the safest investments for capital preservation is a Guaranteed Investment Certificate (GIC). Currently, the best one-year GIC rate is around 4%, which beats the long-term inflation rate of 2–3%. But if you’re looking to make your money work harder over the long term, stocks may be a better option. Historically, stocks have outperformed other asset classes, offering greater potential for long-term growth.
If you’re new to stock investing, dividend investing is a smart place to start. By focusing on stocks that pay regular dividends, you can generate a steady income stream while also benefiting from capital appreciation. The key is to buy these stocks when they are priced below their intrinsic value, ensuring you’re not overpaying. Plus, the dividend yield should be sustainable, ideally surpassing the returns you’d earn from a GIC.
Stock pick: Big Canadian bank
When it comes to Canadian stocks, the banking sector is a great place to look for reliable dividend income. The big banks are well-regulated, highly profitable, and offer solid returns on equity. Among them, Toronto-Dominion Bank (TSX:TD) appears to be the most attractive today.
At $79.39 per share at writing, TD Bank has seen its stock price lag behind its peers this year. Part of the reason for this is an anti-money laundering compliance issue in its U.S. subsidiaries, which led to a US$3.1 billion fine in October. As a result, TD’s growth prospects in the U.S. are likely to be limited in the near-to-medium term.
However, this dip in stock price may present a golden opportunity for long-term investors. At just 10 times earnings (compared to its normal price-to-earnings ratio of about 11.6), TD stock is priced about 14% below its intrinsic value, making it a prime candidate for value investors. Additionally, the bank offers a dividend yield of 5.1%, which is about 28% higher than the current GIC rate. With patience, investors can expect solid returns over time, both from price appreciation and regular dividend payouts.
