With the new year upon us, Canadians can add an additional $7,000 to their Tax-Free Savings Account (TFSA). If you turn 18 years of age in 2025, you can contribute a total of $7,000 to your TFSA.
While it is not a lot of cash to invest, any amount that you can invest tax-free is an amazing gift. For example, if you invested $7,000 in your TFSA at the start of 2025 and earned a compounded 9% annual rate of return (an average return similar to the S&P 500), that investment would be worth $16,571 in 10 years!
Tax can quickly chip away at your rate of return
If that was held in a non-registered investment account, you could be on the hook for as much as $1,200-$1,700 in capital gains tax (depending on your tax bracket). That adds up to almost a point or two off your compounded rate of return (so 7-8% rather than 9%).
The point is that you should take every opportunity you can to invest tax-free with your TFSA. Canadian residents who were born in 1991 or earlier can now invest an accumulated total of $102,000!
You can become a TFSA millionaire with discipline and smart investing
Just imagine the compounding that can occur with a sum that size. It is entirely possible that you could one day become a TFSA millionaire if you contribute annually, invest wisely, and resist the temptation to withdraw your TFSA funds.
In fact, if you smartly invest $102,000 of TFSA funds at a tax-free 9% annual return and regularly contribute (for now, $7,000 per year), it will take you just over 20 years to become a millionaire. If you are in your mid-30s today, that is a very achievable goal for retirement.
Whether you are investing $7,000 for the first time in a TFSA or you are looking to invest the entire contribution limit ($102,000), you will need good stocks to hold. If you are looking for some ideas, two stocks to consider are Constellation Software (TSX:CSU) and TerraVest Industries (TSX:TVK).
One of Canada’s great software compounders
Certainly, Constellation, with its magnificent return track record, is an easy one to consider adding to your TFSA. However, lately market commentators have once again started to worry about its growth potential. Its stock has pulled back by about 10%.
I have seen this happen several times to Constellation. Every time, the company operationally outperforms, and the stock does really well later.
Over the past five years, its stock has risen by a 25% compounded annual growth rate (nearly three times the above-discussed rate of return). Given its large $90 billion size, similar type returns may be difficult.
However, even with half those returns, investors could still do exceptionally well. Constellation has a top management team, an excellent acquisition and operational platform, and a great balance sheet. It’s a great high-quality stock to hold for years ahead in a TFSA.
A great stock to hold long-term in a TFSA
TerraVest is a similar business. Like Constellation, it is very acquisitive. It buys cheap industrial companies, maximizes operational performance to generate strong free cash flows, and reinvests into more businesses.
So far, it has had a winning formula. Its stock has delivered a 56% compounded annual return over the past five years (up 848%) and a 38% compounded annual growth rate over the past 10 years (up 2,574%).
If you want a great compounding stock in the early innings of its growth story, TerraVest is an intriguing stock for a TFSA.
