The TFSA (Tax-Free Savings Account) has become a very important tool in a Canadian investor’s wealth toolkit. As long as you follow Canada Revenue Agency’s rules (mostly don’t over contribute and don’t day trade), all income (dividends, interest, and capital gains) has no reporting requirements and no taxation.
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You can save (and make) thousands with your TFSA
Over a lifetime, the TFSA can save you thousands of dollars. It can make you money too. Since you don’t pay tax on income and gains in the account, you can reinvest all your income and gains. The more income you invest equates to more income earned and vice versa.
This creates a wealth compounding cycle. That is especially true if you choose to not withdraw from the account.
Given that the TFSA was created in 2009, Canadian millennials born in 1991 or earlier get the benefit of $109,000 of accumulated TFSA contribution space. It’s a substantial sum of money that can be invested and grow completely tax-free.
The average 45-year-old TFSA is worth $24,150
Unfortunately, many Canadians aged 40 to 45 are missing out. As of 2023, the average Canadian between 40 to 45 years old has $61,381 of unused TFSA contribution space. The average TFSA fair market value for this age segment is $24,150. Likewise, Canadians in this segment made higher value withdrawals than they did contributions.
To some extent the data makes sense. These are the years when people are starting families, paying for after-school activities, buying houses, going on vacations, and maybe even considering a cottage. It’s a costly period of life.
However, it is also close to one’s peak earnings period. It’s a smart idea to use those peak earnings to put some money aside, both for rainy days and also for long-term retirement savings.
You may have to sacrifice a vacation or new TV at Christmas. Yet, if you put $1,000 aside per month for your TFSA, you would make up for the ~$60,000 of average unused TFSA contribution room in five years. Once that money is in the account, it can start working for you in the most tax-efficient manner possible.
When you combine tax-free income and a couple of decades of income growth, you can see exceptional results. $109,000 invested at a market rate of return (8%) for 20 years could become as much as $508,000.
Aritzia: A perfect long-term TFSA stock
The amazing thing is that you could even do better by smartly picking the right stocks. Aritzia (TSX: ATZ) is an attractive option. Certainly, it may not be the cheapest growth stock.
However, who can argue with compounded annual revenue and earnings per share growth of 24.8% and 25.9%, respectively? Its stock is up 293% in the past five years for a 31% compounded annual growth rate (CAGR).
The investment thesis is pretty simple. Aritzia has 143 boutiques across Canada and the U.S. Yet, it could easily double its current store count in America. As it adds boutiques, digital sales also increase. Digital sales have been accelerating even faster than retail sales.
The more renown it gains in the U.S., the greater the anticipation among stores around the world. It hasn’t even started expanding internationally, so that is a whole new opportunity ahead of Aritzia.
The company has a cash-rich balance sheet and a very savvy management team that is highly tuned to modern fashion trends. If you want a high-quality growth stock to tuck away for decades into your TFSA, Aritzia would be a perfect fit for a millennial investor. You may want to wait for a pullback. However, there are good chances of strong returns over the long term.
