The TFSA (Tax-Free Savings Account) continues to gain popularity with young and middle-aged Canadians. And why would it not? Who doesn’t want to save/invest while all your gains and income are protected from tax?
In 2023, Canadians aged 40 to 44 had a combined total of $32.672 billion invested in their TFSAs. On an average basis, that equates to a $20,670 TFSA. That is up from $17,604 in 2022, so Canadians are putting more emphasis on growing their tax-free savings.
Yet, Canadians aged 40 to 44 could have contributed as much as $88,000 into their TFSA in 2023. This suggests that many middle-aged Canadians are not even using their TFSA at all.
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Why should you use the TFSA?
So, why should adults between 40 and 44 plan to get a move on their TFSA? Well, it is great for a few reasons. First, it is very easy to open. You can get an account open in minutes through an online brokerage. Any bank will do it for you quickly in a branch.
Second, the TFSA only has a few core rules (unlike the RRSP, which can be a little more complicated). Don’t over-contribute. Watch your withdrawals because you don’t get your contribution space back until the following year. Don’t day trade because the Canada Revenue Agency classifies that as operating a business, which isn’t allowed.
Last, the power of tax-free compounding can truly create generational wealth. One major mistake young Canadians make with the TFSA is to only use it as a savings account.
Don’t waste your TFSA as a savings account
Many banks provide attractive promotional interest rates (1% to 3% at best) for TFSA savings accounts. While these seem great in theory, they benefit the banks more than you. They trap your deposits at rates that are below the rate of inflation. The bank can use those stale funds to finance loans and grow its profits. Yet if you keep your cash in these accounts long term, your wealth actually loses value over time.
The point is that to fully maximize your TFSA, you need to invest. You need to invest in something that will at least beat inflation, and hopefully do significantly better. Fortunately, inside a TFSA brokerage account, you can buy everything from money market funds to bonds to indexes to ETFs (exchange-traded funds) to individual stocks.
Compound tax-free with Canadian stocks like this
Here at the Fool, we are all about building a portfolio of individual stocks. One of my favourite stocks for a TFSA purchase right now is Colliers International Group (TSX: CIGI). I like this stock because of its diversified business.
It has a globally renowned commercial real estate services business. This is its bread and butter. However, it has a fast-growing engineering services segment and a very stable investment management segment.
Colliers has a great record of growing its business by consolidating attractive markets. It did that with real estate brokerage 10 years ago. Today, it is building a substantial engineering, consulting, and advisory empire. Investment management earns attractive margins and could be a spin-out candidate one day.
Colliers has compounded investor capital by a mid-teens rate for almost three decades. This Canadian stock won’t make you rich in a month or a year. However, if you hold it in a TFSA and let it build value tax-free year after year, it could create substantial wealth over time.
