Retirement might not be a top-of-mind concern for a 20- or 30-something, but these are your best years to save for future you. Thankfully, it’s ridiculously easy to create a million-dollar TFSA!
What is the Tax-Free Savings Account (TFSA)?
The Tax-Free Savings Account was introduced in 2009 to help Canadians save money. This account is special because any investment income earned inside of it is completely tax-free. This means any interest, dividends, capital gains earned within the account will never be taxed. You can deposit $500 and if a few years later it grows to $1,000, you will pay ZERO TAXES on that.
The best place to put your TFSA is Wealthsimple. We’ll take more about that later, but if you’re in a hurry, sign up now to get your first $10,000 managed for free.
The tax-free power of the TFSA makes it vastly superior to any other tax-shelter, including the RRSP. If you’re struggling to choose between the RRSP and the TFSA, the TFSA is almost always the better choice with few exceptions. If you are really uncertain, go with the TFSA first. After all, you can always move money from your TFSA to your RRSP without consequence, but you can’t go the other way!
Want more detailed explanations? Check out these posts!:
- The New 2019 TFSA Explained
- Everything You Need to Know About the 2019 RRSP
- Wealthsimple Review: Simple Investing on Autopilot
- The TFSA vs. The RRSP
Everyone should have a TFSA. Once they do, all you need to do is keep track of your annual and lifetime contribution limits, and then leave the rest up to the account to do its masterful work.
How does a TFSA become a million dollar asset?
If you’re in your 20’s or 30’s, the only way your TFSA won’t become a million-dollar asset is if you don’t use it.
Yes, it really is that simple.
If you’re more than 25 years away from retirement and you diligently contribute to your TFSA, you will be a millionaire. You don’t even have to max it out (though you should definitely try!). Time, discipline, and the stock market are the magic combination that transforms an ordinary tax-shelter into the nest egg of your dreams.
Thanks to interest, dividends, and capital gains, a properly invested TFSA will become a million dollar asset. All it takes is time.
Why try for a million dollar TFSA?
The power for the TFSA comes from its tax-free status. If you save $1 million dollars or more in your TFSA for retirement, that will become completely tax-free income for you when you retire.
Furthermore, because it is tax-free income in retirement, it will not result in any clawbacks on government pensions and subsidies you receive, like the CPP or OAS. It also won’t increase income taxes on taxable withdrawals from other savings you might have, like RRSPs.
If the Tax-Free Savings Account is the only place you can afford to save, it will be enough for retirement. You won’t need anything else.
Assuming the classic 4% withdrawal rate, a million-dollar TFSA will provide you with a completely tax-free income of $40,000 per year in retirement. Because this is TAX-FREE INCOME (have I said it enough yet?) the CRA will actually think you’re surviving on $0. You’ll qualify for every low-income seniors benefit on the planet. This will make you the richest poor grandparent around!
This is a boring conversation with a lot of hypothetical numbers for anyone multiple decades away from retirement, but I promise that you will someday care very much about this math. Try to imagine 76-year-old you going on glamorous cruises with your TFSA riches while the Government of Canada still offers you full Old-Age Security like a low-income senior.
Wait, you ask, isn’t dodging taxes a rich person thing? Why yes, but you’re a millionaire now so why not you, my friend, why not you?
Case Study: A 25-year-old saves a million-dollar TFSA by retirement
Let’s say you are currently 25 years old. You were born in 1994 and therefore have $48,500 of lifetime TFSA contribution room. You’ve been saving a little bit in a TFSA with your bank since you turned 18, but not very seriously, so you only have $10,000.
You go ahead and open a TFSA with Wealthsimple with the $10,000 you’ve already saved. You then set up an automatic contribution of $250 every twice-monthly payday. You wish you could contribute a bit extra to catch up on unused contribution room, but you simply don’t have the flexibility in your budget right now.
Nevertheless, much to your surprise, your TFSA still crosses the seven-figure threshold by your retirement age of 65, even at a modest return of 6%.
Isn’t that amazing? I look at these numbers for fun all the time and I’m still in awe at the power of compounding.
If you are able to max out previous unused contribution room, and/or the annual TFSA contribution limit increases in years going forward, and/or you earn a return greater than 6%, you’ll have even more.
Likewise, even if you aren’t able to maximize your contributions now, or you have nothing saved in a TFSA yet, it’s still possible for you to build a million-dollar TFSA. You just have to find the right combination. If you want to play around with numbers and scenarios, try this simple future value calculator here.
A Step by Step Action Plan to Build a Million Dollar TFSA
Let me reassure you that building a million-dollar TFSA portfolio is actually very simple. Here are the steps:
1. Open a TFSA to invest in the stock market
Unfortunately, at current interest rates, you can’t save your way to a million-dollar TFSA. You’re going to have to invest your money in the stock market in order to earn the return necessary to create a million-dollar asset.
If you don’t feel comfortable investing your money in the stock market yourself, or you just want to take a hands-off approach, sign up for the robo-advisor Wealthsimple. By opening a TFSA with as little as $100, your money will be put to work in the stock market. You don’t even have to lift a finger.
On the other hand, if you do feel comfortable research stocks and making your own trades, Questrade is the best discount online brokerage available to manage your own portfolio. You’ll need at least $1,000 to open a TFSA, and you’ll be responsible for managing all your investments.
2. Determine your lifetime contribution limit
If you’ve just opened your first TFSA, or you already have a TFSA that you’ve been contributing to lackadaisically, one of the first things you’ll need to figure out is how much contribution room you have.
The Tax-Free Savings Account contribution limit for 2019 is $6,000. However, you’re entitled to all the contribution room that’s accrued since 2009 or you turned 18 (whichever came first!).
In the example above we used a 25-year-old who was not 18 in 2009. But if you were age 18 or older in 2009, you’re actually entitled to the full lifetime contribution room. The lifetime contribution of the TFSA is $63,500.
3. Set up an automatic weekly or monthly contribution to your TFSA
Once your TFSA is set up, it’s imperative that you contribute to it on a regular basis. After all, there’s no way for it to grow to a million dollars if there’s no money in there.
I recommend setting up a regular transfer from your chequing account to your TFSA that coincides with payday. This way there will always be money available. You’re “paying yourself first” before you use your paycheque for anything else.
If you’re worried frequent transactions are going to incur fees with your chequing account, you need to switch a no-fee alternative like Tangerine or KOHO. Once you have an account with these, set up your TFSA as a bill pay. Establish your regular monthly contribution. You can also add extra whenever you have dollars to spare!
Your savings will become a million-dollar TFSA as long as you’re diligent. Even if you don’t cross the seven-figure threshold, falling short is still enough to sleep well at night. Nobody scoffs at $800,000 In short, focus on your TFSA, because it’s all you need!
Great article! The TFSA is a highly over looked vehicle and my favourite. Another way to look up your contribution room is through MyCRA if you want the extra peace of mind knowing you wouldn’t be going over the limit.
Hi Brigitte, I am a Canadian living abroad. Can I still open a TFA? Thanks!
Yes but there are some residency rules! They’re listed here https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/who-open-a-tfsa.html
Basically you don’t accrue contribution room for the years you are not a resident of Canada, but generally if you’re a Canadian, you can have a TFSA even if you’re currently not living here.
Hi Bridget, what do you recommend investing in once the tfsa is set up? Mutual fund, index, stocks, gic, etc.?
You can use either a roboadvisor or a self-directed brokerage account!
A roboadvisor is the best choice if you are just getting started and don’t know anything about investing. A self-directed brokerage account is better for people who know how to buy and sell stocks and ETFs. If you check under the investing section on Money After Graduation, we have quite a few articles on roboadvisors and self directed investing, but if you want a shortcut I recommend Wealthsimple moneyaftergraduation.com/wealthsimple for a robo-advisor!
Do you still recommend wealthsimple for TFSA investing? It seems Questwealth has lower fees and is performing well?