Do you want to maximize your TFSA contribution room in 2025 and beyond?
Technically, it’s not the easiest thing to do, as all Canadians simply accumulate the same amount of contribution room over the course of their adult lives. There is not a lot of difference between how much contribution room John and Mary get, provided the two of them are the same age and were living in Canada their entire adult lives.
There are definitely ways to maximize your TFSA account balance – namely by investing well over a period of years. Getting additional contribution room is not so straightforward. However, there are ways it can be done. In this article, I will explore how to maximize your TFSA contribution over the long term, so you always have the option of investing money tax-free.
Tip #1: Plan withdrawals intelligently
The main way that you can lose TFSA contribution room is by withdrawing money from your TFSA. If you do so, you do gain the contribution room back, but only in the next calendar year. It follows from this that the later in the year you withdraw, the less time you spend with diminished contribution room. So, withdraw TFSA funds late in the year if possible. Doing so can maximize your available TFSA contribution room.
Tip #2: Invest progressively rather than in lump sums
A second way to maximize your available TFSA contribution room is to invest in small amounts over time. Studies show that this approach – known as dollar cost averaging (DCA) – performs better than investing lump sums. It also leaves you with more TFSA room available for a longer period of time.
So, how does dollar cost averaging increase your returns? Mainly, by sparing you the fate of going all-in at local market tops. The stock market trends up and down over time: go all-in at too high a price, and you suffer inferior returns; try for too low a price, and you miss the chance to invest. By dollar-cost-averaging, you get definitionally the average price over your time horizon. This is better than going all-in at the top or missing out on gains by fishing for a bottom that never arrives.
A good example to work with here is Fortis Inc (TSX:FTS). If you’d gone all-in at the May 2022 high of $58.51, you’d barely be up today, with the stock trading at just $60.35. That is a mere 3.1% capital gain.
If, on the other hand, you’d bought progressively from May of 2022 to today, you’d have had the opportunity to buy at much cheaper prices, such as $46 in October of 2022, $47.80 in October of 2023, and $51.20 near the start of this year. The end result would have been a much higher total return compared to going all in in May of 2022.
Tip #3: Don’t break TFSA account rules
Last but not least, you shouldn’t break any TFSA account rules. If you break TFSA account rules by, say, day trading full time, you will have to pay taxes on your holdings, and you will not get extra contribution room to make up for what you lost in taxes. You also won’t get back over-contributed amounts even after they are withdrawn. So, play by the rules. It pays off over the long run.
