Is it possible to increase your TFSA contribution room – even doubling it?
Technically, yes. If you realize gains in a TFSA, then withdraw the amount you’ve made gains on, and then wait 12 months. You can then deposit an amount in excess of the contribution room accumulated over your lifetime. This is, however, a rare situation – usually, you want to keep your existing TFSA money in your TFSA, so as to continue the flow of compounding.
So, the question of how to double your TFSA contribution is really a question about making more contributions. How do you discipline yourself enough to contribute to your TFSA at twice the rate you’re now doing?
We all know that it’s tough covering daily living expenses. Rent, mortgages, car payments and – especially these days – fuel, they all add up. However, if you take a disciplined and pragmatic, long-term approach, you can likely contribute more money to your TFSA than you think.
In this article, I explore a strategy that just might double your TFSA contribution rate over time – and probably improve your investment results too.
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Dollar cost averaging
Dollar cost averaging (DCA) is a strategy whereby you contribute a little bit of money to an investment at regular intervals, instead of all in one lump sum. The way you execute this strategy is you simply contribute a fixed percentage of every paycheque you earn to a TFSA, maybe 10% or 20%. The more the better.
Why it’s an effective investment strategy
Dollar cost averaging is an effective strategy because it spares you the two main risks investors expose themselves to in the stock market:
- Going all in with a lump sum investment at a market top, and enduring many years of negative returns.
- Attempting to time a market bottom, hoping to invest at a very low price, and then subsequently not investing at all.
Both of these are major problems that investors can face, and the DCA strategy solves them both. By buying into the markets incrementally over time, you skip both of the problems just mentioned (buying too high with a large percentage of your money, or not buying at all because you think the markets are going lower). Studies show that investors who DCA tend to outperform other investors over the long run. So, DCA is a good strategy.
An example of a good TFSA fund
Having established that DCA-ing is a good investment strategy, it’s time to think about what to invest in. You can hold stocks, bonds, and funds of all types in your TFSA. Which option is best?
For most investors, index funds. Offering low fees and high diversification, they deliver considerable bang for your buck, a fact that is backed by decades of academic research.
Consider the Vanguard FTSE Canada Index ETF (TSX: VCN), for example. It’s a “total market” Canada ETF that holds 86 large cap Canadian stocks. With a 0.06 management expense ratio, it is relatively cheap (in fee terms not necessarily in valuation terms). It is a pretty popular and widely traded fund, which gives it a low $0.01 bid-ask spread, about 0.01% of the fund’s price. It has a 2.2% dividend yield (trailing). So, it’s overall a pretty decent large cap Canadian fund. It could be a good one to dollar cost average into.
