The TFSA (Tax-Free Savings Account) is an essential tool in developing a wealth plan for retirement. Any opportunity to save on tax means more cash hitting your pocketbook and staying with you into/through retirement.
Right now, Canadians who were 18 years or older in 2009 can contribute up to $109,000 into their TFSA. However, the average TFSA market value for someone aged 60 is closer to $45,000.
This is a 20% increase from those in the age range of 55 to 59, so it means Canadians are starting to look seriously at their savings rate in their 60s.
However, it also still shows that many individuals in that age bracket have not fully maximized their TFSA benefits. Fortunately, it is never too late to let tax-free compounding work for you.
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How buying Royal Bank could have increased your TFSA wealth by $66,309
Here is one example of how the TFSA could have helped drastically improve your wealth for retirement. Say you maxed out your TFSA contribution at $5,000 in 2009. Say you put all that cash into a blue-chip Canadian stock like Royal Bank of Canada (TSX:RY).
Well, that investment would be worth close to $36,331 today (a 12% return compounded annual growth rate (CAGR))! That would give you a $31,331 capital gain! When you add in dividends reinvested in the stock over that time, your investment could be worth as much as $71,309 (a 16.4% CAGR)!
Just that investment alone would put you with a higher TFSA balance than most 60-year-old Canadians. You would have saved over $10,000 in tax by just making that investment inside your TFSA!
Use the TFSA to invest, not just save
The whole point of this exercise is to show that you don’t need to 100% max out your TFSA contribution to hit a TFSA balance that is above the Canadian average. Contributing and investing are how substantial wealth is made. Even small contributions can become large when they are invested smartly and given enough time to compound value.
Many Canadians make the mistake of just using the TFSA as a higher-interest savings account. Well, if you had just invested that $5,000 into a “high-interest TFSA” at a rate of 2.5% for the past 17.5 years, your TFSA balance would only be $7,700 today!
You can do better if you are willing to take a bit more risk. Stocks are an ideal investment vehicle for the TFSA because they are cheap to buy, highly liquid, and have great upside.
Descartes Systems could be a perfect addition
One stock I would be looking to add to my TFSA today is Descartes Systems Group (TSX:DSG). If you bought this stock in 2009, you would be up 2,793%! A $5,000 investment would be worth $146,735 today!
The attractive thing about this stock is that it is down 35% in the past year. It is actually trading close to its lowest valuation in the past 10 years.
Descartes provides critical networks and software for the global logistics and transportation industry. Even though the stock is down, it just delivered another record quarter. Sales rose 15% to $193 million, adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) increased 20% to $89 million (a 46% margin), and earnings per share rose 34% to $0.55.
The company has $377 million of net cash, so it can be opportunistic about acquisition growth. Add this stock to your TFSA, and you get a fortress balance sheet, mid-teens growth, and a very reasonable valuation. It all sounds like a perfect pick for long-term future gains ahead.
