The Tax-Free Savings Account (TFSA) can build your wealth if used at maximum efficiency. According to Statistics Canada, Canadians aged 50-54 made an average TFSA contribution of $10,331 and had unused contribution room of $53,490 in 2022. Having a significant amount of unused contribution room is not efficient in an account that allows tax-free withdrawals.
Lower contributions may be due to people in this age group allocating savings in accounts that allow them to deduct taxable income. The investments of today might save you 20-30% tax on your contributions, but it will make your withdrawals taxable. You can use the tax money saved to invest in a TFSA.
How TFSA can help you make investments efficiently
TFSA has three benefits that make it efficient for long-term investments:
- You can withdraw any amount, at any time, tax-free, making it ideal for emergency funds.
- You can grow your investments tax-free, which means if you sell a stock and use that money to buy another stock, you don’t pay capital gains tax.
- The capital gains tax benefit applies to investments in U.S. stocks.
- Frequent trading in stocks is not allowed, which means you have to stay invested in a stock for several months or years.
Spending time in the market helps you earn better returns if you invest in fundamentally strong stocks.
How to structure a $28,000 TFSA for maximum efficiency
The above benefits of a TFSA make it ideal for growth stocks and high-growth dividend stocks, resulting in significant savings on dividends and capital gains tax.
Investing in U.S. growth stock through TFSA
You could consider investing $10,000 in U.S. growth stocks like Nvidia (NASDAQ:NVDA) and ride the artificial intelligence (AI) rally. The stock has the potential to grow your $10,000 to $100,000 in the next 10-12 years through several growth cycles like blockchain, AI at the edge, self-driving cars, and esports. What makes Nvidia unique is its technological advantage over others in these tech trends.
Nvidia will give you the benefit of currency fluctuation, and TFSA will make your capital gains tax-free. You can book profits after every growth cycle as long as you buy and sell shares in longer intervals.
Resilient growth stocks
You could consider investing another $10,000 in Canadian growth stocks, like Topicus.com (TSXV:TOI) and Descartes Systems (TSX:DSG). Descartes has no debt, a $175 million cash reserve, and a $350 million undrawn line of credit to fund acquisitions. The company keeps enhancing its supply chain management and logistics solutions to make them relevant to current needs. Trade complexities will keep driving demand for Descartes’s solutions and grow its share price. Scale and operating efficiency will help the company improve its profit margins.
Topicus.com fuels growth by acquiring vertical-specific software companies in Europe with recurring cash flow from maintenance services. It reinvests the cash flow to acquire more companies, compounding returns. As more companies are added, the enterprise value will grow. Moreover, the acquired companies will also grow organically. As long as Topicus.com acquires good companies, achieves cost efficiencies, and grows its cash flow, its share price will grow.
The above two stocks could double your money in five to seven years.
Making the most of dividend-growth stock
The remaining $8,000 can be invested in Canadian Natural Resources (TSX:CNQ). This stock has a history of growing dividends for 25 consecutive years at a compound annual growth rate (CAGR) of 21%. The company produces oil and gas at low cost and can continue to pay its current dividends even at US$50/barrel.
The company keeps increasing its production capacity and uses the increasing cash flow to pay dividends, expand production, and service debt. It factors in the dividend and maintenance cost when calculating the cost per barrel. This raises assurance that it can continue growing dividends for years.
Canadian Natural Resources does not offer a dividend-reinvestment plan, which means you have to take the payouts. You can use the dividends to buy cyclical stocks or high-risk stocks without disturbing the balance of your TFSA portfolio. You can also use the Topicus.com model and use the dividend money to buy high-yield dividend stocks and compound passive income.
