If you haven’t contributed to your TFSA (it’s a $7,000 limit this year), or if you’ve done so but haven’t invested the proceeds, with much of it just sitting there in a cash balance, it might be time to start strategizing so that you can optimize your path to greater TFSA wealth. Of course, it doesn’t take any kind of complex trading strategy (excessive trading can be penalized if done within a TFSA, by the way!) or any sort of seasoned, advanced investment game plan to get into the TFSA wealth-compounding fast lane in today’s inflationary climate.
What is needed, at least in my view, is patience and the ability to maximize your holding period rather than the number of trades you make in any given year! If anything, the longer your investment horizon and the lower your trade count, the better, at least for most new investors who might think they have to do something because a stock is moving down, up, sideways, or all of the above.
In this piece, we’ll look into three simple strategies that wealthy (and I’m using the term loosely here to define a Canadian TFSA investor who has stayed on top of TFSA contributions while investing the proceeds since they were eligible) TFSA users tend to implement.
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Actually contributing and investing, rather than timing the market
First and perhaps most obvious, wealthy TFSA investors actually contribute and invest, preferably in equities over risk-free assets, including GICs and money market funds, or “lower-risk” assets like bonds, bond funds or mixed funds of stocks and bonds.
Indeed, contributing at a set time and not letting contribution space pile up is key, as is investing in quality equities at reasonable prices so that you can participate in market (Canadian or U.S.) returns, even when it feels unpleasant to go for stocks, whether it’s because pundits view markets as pricey or because stocks have been going down in recent weeks or months.
Either way, taking timing out and putting time in the market, I believe, is a formula for supercharging your TFSA nest egg.
Growing the TFSA nest egg faster: Reserving the TFSA for one’s best ideas, which includes growth stocks
Don’t speculate on momentum stocks you don’t understand or value, but do not be afraid of growth plays with your TFSA, especially if you’re younger and don’t see yourself withdrawing from your TFSA at any time in the next 5–10 years. Indeed, not everybody is going to capture the next Shopify (TSX: SHOP).
But for those comfortable with volatility and the long-term opportunity at play (for Shopify, it’s all about the rise of the AI-driven shopping economy these days), I do think that the name is worth hanging onto in a TFSA, provided you can get in at a valuation that makes sense (think buying dips). As always, though, not everyone is suited for growth investments that are far more volatile than the market. So, understand your risk profile and how a TFSA can be a tool to give you a jolt.
Turning your TFSA into a tax-free passive income machine
Finally, if you’ve got a swollen TFSA (let’s say in the six figures), it can be a nice income supplement, especially for the retired (if you’re retired, you’re probably wealthy enough). Indeed, you’ve got to have big wealth to make significant passive income.
And if tax-free income is your goal, the TFSA can sure stand tall when invested in higher-yielding (think 3-4%) equity ETFs or even some of the spicier, higher-yielding plays (covered call ETFs, perhaps) for an added boost. As always, though, balancing risk and reward is key, especially for those nearing the retirement finish line! So, if you don’t need the growth but could use the passive income, the TFSA fits the bill while serving as a profoundly useful tool.
