Millennials and Gen Zs are giving away free money by using their Tax-Free Savings Account (TFSA) as a bank savings account. They keep their money there and withdraw it to meet immediate future expenses. You are making the biggest financial mistake if you are also doing the same.
Remember, cash is a depreciating asset and hoarding it, including in a TFSA, is like losing the opportunity to save taxes when you are rich. You don’t want your 45-year-old self to blame you for wasting the golden time of your life not using the TFSA tax benefit.
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How to make the most of a TFSA
The TFSA allows your investment income to be withdrawn tax-free. Let’s take two scenarios: Ron and Harry are in their mid-30s and invest $10,000 in their TFSA during the 2021 pandemic. Ron kept his money idle while Harry bought Lundin Gold (TSX:LUG) shares. Investors often buy gold in a panic.
Five years later, Ron’s $10,000 remains unchanged. In fact, their purchasing power has reduced due to inflation. Meanwhile, Harry’s $10,000 is now $117,046, and the entire amount is tax-free. He can sell some of that amount and invest in other growth stocks trading near their lows, without affecting his TFSA contribution room. The contribution room is not affected until the amount is withdrawn from the TFSA.
Three TSX stocks to multiply your TFSA wealth
Lundin Gold
Lundin Gold is a buy even at its 52-week high as the changing geopolitical landscape, rising tensions of war, and uncertainty around US policies make businesses and investors all trust the value of gold. The very first reason why the US dollar became strong was its high gold reserves. The rush for the petrodollar is making oil prices volatile.
Any material change in the energy landscape will require a few years to materialize. Throughout this time, gold demand will rise as many countries fund wars using their gold and natural resources. Central banks worldwide will accumulate gold for a longer term, as they have been for the past four years. Lundin has increased its gold production and has a lower all-in sustaining cost (AISC), giving it scope to earn more profit and a higher share price than other gold stocks.
Constellation Software stock
If you are looking to book some profit and invest it in a buy-the-dip opportunity, Constellation Software (TSX:CSU) is a perfect TFSA stock. It acquires software companies in mission-critical applications that generate annual recurring cash flow from maintenance.
The share price has dipped to its 52-week low due to the management change and slightly higher but manageable debt. A stable source of cash flow amidst uncertainty is valuable, and the market has not yet valued it properly. Now is a good time to buy and hold CSU stock for the long term, as the recovery rally itself will grow your investment by 50%. Further, new acquisitions under the guidance of new management will drive the compounding effect and grow the stock to a new high. Until then, you have to hold.
Telus stock
Telus Corporation (TSX:T) is another TFSA wealth booster trading near its low. However, the stock could see a recovery as the management has paused dividend growth to channel that money into reducing leverage. It doesn’t make economic sense for Canadian telcos to keep high leverage as their return on investment (ROI) from the 5G infrastructure has reduced due to regulatory change. The offloading of debt, buyback of shares, and converting those shares into dividend reinvestment (DRIP) will enhance the share value and reduce equity dilution.
Now is a good time to buy the stock and lock in a 9% yield, even if it means no dividend growth for a year or two. Nine percent is a high premium, and you will also get capital appreciation.
