The Tax-Free Savings Account (TFSA) has become a staple of Canadian retirement planning. However, the size of a retirement-ready TFSA isn’t easily determinable. Financial planners see this wealth-building tool as a booster to the Canada Pension Plan (CPP) and Old Age Security (OAS), rather than a standalone leg in retirement.
Data from the Canada Revenue Agency (CRA) shows that the average balance per individual as of 2024 is just $38,566 compared to the maximum cumulative contribution room of $109,000. Furthermore, underutilization is widespread across age brackets, from under 20 to retirees aged 80 or older.
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A conservative TFSA baseline
Targeting a $300,000 TFSA balance is both achievable and a realistic baseline in a longer investment horizon. Anything higher results in a larger income. It is important to remember that you’re building a third leg, not a lone pillar, in retirement. The amount, along with a conservative 4% withdrawal rate, will generate $12,000 in annual tax-free income or $1,000 per month.
In 2026, the average CPP and maximum OAS retirement pensions at age 65 are $925.35 and $751.96, respectively. When combined with TFSA income, the total annual income is $34,527.72, or $2,877.31 per month. Retirees have incentives to delay collecting CPP or OAS benefits. The payouts increase by 8.4% and 7.2% per year until age 70.
Supreme advantage
The TFSA has no maximum age limit, unlike the Registered Retirement Savings Plan (RRSP). This feature enables users to have a financial engine for life and receive pension-like, tax-free income throughout retirement. While contributions are not tax-deductible, money growth is tax-free. TFSA investors must also follow contribution limits to avoid paying a penalty tax.
Notably, the CRA-imposed annual limit prevents wealthy account holders from contributing unlimited amounts to reduce their tax payable. It also protects government tax revenues. The framers intended the TFSA primarily to help middle- and low-income earners to meet short- and long-term financial goals.
Long-term compounding
A suitable long-term income compounder and sleep-at-night TFSA holding is Fortis (TSX:FTS). This Canadian dividend king boasts an impressive 52 consecutive years of dividend increases. The top-tier utility stock currently trades at $80.55 per share, up 14.8% year-to-date and pays a 3.2% dividend.
For illustration purposes, a starting position of $49,000 ($7,000 x 7) will compound to approximately $92,700 in 20 years with simple annual compounding and reinvestment of quarterly dividends. Also, the computation assumes a fixed share price and yield, not including future dividend growth and price appreciation.
Earnings from essential services, such as transmission and distribution of electricity or gas, are resilient regardless of the economic environment. The $40.4 billion electric and gas utility company’s annual dividend growth guidance is 4% to 6% through 2030. Expect the dividend yield to climb higher if Fortis meets its target.
David Hutchens, President and CEO, said the strong Q1 2026 results reflect the strength of the diversified business and the continued execution of the low-risk capital plan.
Catch up and reward yourself
Let it be known that the TFSA is not a place to store cash. The unused contribution room can multiply if invested in income-generating assets. There’s enough time to play catch-up and reward yourself with a self-sustaining tax-free income in retirement.
