How to Get Your TFSA to $1,000,000

A Tax-Free Savings Account (TFSA) is a tool that can be used to build long-term wealth. But only a small part of Canadian residents realize the potential of this registered account.

In fact, many Canadians think that a TFSA is just a savings account. But you can hold many qualified investments in a TFSA including stocks, mutual funds, bonds, and exchange-traded funds, or ETFs.

A TFSA also offers you a ton of flexibility because you can withdraw or liquidate your assets at any time without paying taxes to the Canada Revenue Agency. So, you can hold short-term bonds in a TFSA and create an emergency fund, while long-term investors can use a registered account to hold a portfolio of quality stocks.

The TFSA was launched in 2009, and the cumulative contribution room available in 2023 increases to $88,000. So, if you have $88,000 to invest in a TFSA, here’s how you can turn it into $1 million.

Benefit from the power of compounding

Albert Einstein once claimed that the power of compounding was the eighth wonder of the world. It is important to start your investment journey as early as possible and put your money to work.

For example, if you invest $1,500 per month for 35 years, your portfolio will be worth close to $1 million, given an annual return of 12%. However, if you delay these investments for 10 years, you will need to invest more than $5,000 per month.

Maximize TFSA contributions each year

You must calculate your TFSA contributions each year as the number is indexed to inflation. In 2023, TFSA contribution room increases to $6,500 from $6,000 in 2022. It is important to maximize your TFSA contributions each year, as any unused contribution room can be carried over to subsequent years. .

In the last 14 years, the S&P 500 index returned 14% annually to investors after adjusting for dividends. So, if you invested $500 per month in the S&P 500 for the past 14 years, your TFSA portfolio would be worth $250,000 today.

If you stop investing, this amount will still grow to $1 million over the next 14 years if the S&P 500 rises 10% each year.

Identify winning bets

In addition to regular and long-term contributions, you should also choose asset classes that have the potential to provide outsized gains over time. So, build a diversified portfolio of growth, dividend, and blue-chip stocks in a TFSA to help you reach your financial goals faster.

What to hold in a TFSA

As stated earlier, your portfolio should be well diversified with a mix of bonds, stocks, and ETFs. If you are younger, you may have greater exposure to riskier assets such as growth stocks. But if you’re nearing retirement, it makes sense to invest in bonds and ETFs.

Therefore, a 25-year-old investor can hold 20% of the total holdings in bonds and 50% in index funds such as the S&P 500. The rest can be allocated to quality growth stocks such as Apple (NASDAQ:AAPL), Amazon, Shopify, Nvidia, and Twelve.

An investment of $10,000 each in Amazon and Apple 10 years ago would be worth $319,000 and $443,000, respectively, today.

While investing in growth stocks, you need to identify companies that enjoy a broad economic moat and are part of an expanding market that can be addressed. The fundamentals of these companies must be sound, allowing them to thrive throughout market cycles.

For example, Apple has a diversified revenue base and continues to expand its portfolio of products and services. It has consistently delivered market gains to shareholders, easily outperforming most broader indexes.

For those with a higher risk appetite, investing in spot-Bitcoin ETFs can also be a great strategy if you are bullish on the widespread adoption of cryptocurrencies in the coming decade.

Your investment strategy will depend on your age, financial goals, available capital, and risk tolerance level.