According to the Canada Revenue Agency’s (CRA) figures from the 2023 contribution year, the average fair market value for Tax-Free Savings Account (TFSA) holders of Canadians between 55 and 59 was $37,600. Those aged between 60 and 64 averaged around $45,100. Compared to the average fair market value of these two age bands, the cumulative contribution limit reached by the TFSA since its inception stood at $88,000. This shows a significant gap between what could have been held in a TFSA and what was actually held.
Many investors who recently started understanding the value of the TFSA might think the gap is a wasted opportunity. However, judging a TFSA by its fair market value today is not the best approach for preparing your portfolio for retirement. Instead, you should consider what it can still become from this point forward.
If you are a Canadian approaching 60, your TFSA can still be a powerful tool to help you enjoy a comfortable retirement. Any contributions you make to a TFSA are with after-tax dollars. This means the returns on your investments held in the account can grow tax-free, including interest, capital appreciation, and dividend income.
To make things even better, withdrawals from a TFSA also remain tax-free and do not contribute to your taxable income. This means you can use the extra income from your TFSA without worrying about moving to a higher tax bracket in retirement.
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Considerations for Canadians nearing retirement
A 60-year-old Canadian might want tax-free income before they start collecting their benefits from the Canada Pension Plan (CPP) and Old Age Security (OAS). They might even want to minimize how much they withdraw from their Registered Retirement Savings Plan (RRSP) to avoid moving to a higher tax bracket.
The secondary nest egg you build in a TFSA can create the buffer you need to handle big expenses in your retirement without worrying about additional taxable income. If you plan to use the TFSA only for emergency savings, using the account to hold Guaranteed Investment Certificates (GICs) or other income-generating assets with lower returns would make sense.
For those who want to use their TFSAs as an additional income stream in retirement, a portfolio of high-quality dividend stocks might be a better way to use the available contribution room. To this end, Royal Bank of Canada (TSX:RY) can be a good fit to consider.
Royal Bank of Canada
RBC is Canada’s largest bank and the biggest stock trading on the stock market by market capitalization. This $405.3 billion market cap has long been a staple for many stock market investors, especially those who want a powerful mix of dividends, earnings power, compounded growth, and reliability.
RBC stock fares well through different economic cycles because it is a well-capitalized business and a well-run financial institution. Its recent earnings report showed a 25% year-over-year uptick in its net income for the second quarter of the fiscal year. Its adjusted net income also increased by 23%. In the quarter, the bank returned $4 billion of capital to shareholders through dividends and share buybacks.
Foolish takeaway
When Canadians invest in RBC stock, they invest in a quality business that pays regular distributions to investors. As of this writing, the stock trades for $291.62 per share, and boasts a 2.4% annualized dividend yield that you can lock into your portfolio today. Carefully building a well-balanced portfolio that offers income and growth can help you make the most of your TFSA and plan a comfortable retirement.
