How to Make Good Use of Your TFSA

Use a TFSA as a part of your strategy to achieve your financial goals by investing in quality stocks or growth stocks such as Shopify Inc. (TSX:SHOP)(NYSE:SHOP).

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Since Tax-Free Savings Accounts (TFSAs) are newer than Registered Retirement Savings Plans (RRSPs), some investors may wonder how to make good use of a TFSA.

What’s earned in a TFSA is tax-free, which allows substantial tax savings for returns compounded over many years. Even though TFSAs are called “savings accounts,” they are actually good for investing in stocks.

Why should you consider stocks? Interest rates are low. Additionally, long-term stock returns have tended to outperform other investments, including bonds.

Here’s how you can make good use of your TFSA.

Investing for big purchases

Because you can withdraw from TFSAs without penalties anytime, they are great for saving or investing for big purchases, such as vacations, cars, and mortgages.

The TFSA contribution limit for 2017 is $5,500. If you’ve never contributed to a TFSA before, you could have as much as $52,000 of contribution room.

An amount of $52,000 invested in a TFSA for a 4% dividend yield would generate $2,080 of tax-free income per year. That’s enough for a nice vacation every year!

You can achieve a 4% portfolio yield by building a portfolio with proven dividend-growth stocks, including Telus Corporation (TSX:T)(NYSE:TU), which offers a nice 4.3% yield. Management also aims to grow Telus’s dividend at a compound annual growth rate of at least 7% for the next two years.

think, plan, and act to work towards your financial goals

If you’re planning to make bigger purchases, such as a car or mortgage (assuming you want to save at least 20% of down payment to avoid having to pay the CMHC mortgage loan insurance), you can target higher rates of returns, likely with a mix of dividends and growth from capital appreciation.

Expect to take multiple years to save enough for these big purchases because the amount you save and the careful investment for reasonable returns are both essential.

Also, be aware that if a market crash occurs, you’ll have to delay your purchases. Assuming you build a diversified portfolio of quality stocks, market crashes will only bring your portfolio down temporarily. History shows that market crashes typically recover within two years.

Investing for retirement

If you’re investing for retirement, you may have decades for your investments to grow. Investing in stocks in your TFSA can be a part of your overall strategy to help you secure a comfortable retirement.

Generally, you can’t go wrong by focusing on quality companies across different sectors and industries, especially if they are companies that have track records of increasing their dividends.

You can also sprinkle in some growth stocks, such as Shopify Inc. (TSX:SHOP)(NYSE:SHOP), to boost the growth of your portfolio.

Assuming you invest $5,500 every year in your TFSA over 10 years for a reasonable rate of return of 8%, you’ll amass nearly $83,850. In 20 years, you’ll amass $269,966. And in 30 years, you’ll have $683,076!

Investor takeaway

A TFSA can be a part of your overall strategy to reach your financial goals, whether it’s to fund your vacation every year, your new car, a mortgage, or even your retirement. The earlier you start, the less risk you can take while investing for a reasonable rate of return.

Here’s one more tip: since TFSA withdrawals are tax-free, you can also use your TFSA funds in an emergency if needed.

Should you invest $1,000 in Shopify right now?

Before you buy stock in Shopify, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Shopify wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has no position in any stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and SHOPIFY INC. Shopify is a recommendation of Stock Advisor Canada.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

Canadian Red maple leaves seamless wallpaper pattern
Dividend Stocks

5 Canadian Dividend Stocks to Buy and Hold for the Next 20 Years

These Canadian stocks have paid dividends for decades, making them reliable investments to generate regular passive income.

Read more »

Dividend Stocks

3 Canadian REIT Stocks to Buy and Hold for the Next Quarter-Century

These three Canadian REITs trade cheaply and are highly reliable, making them some of the best stocks you can buy…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »

rail train
Dividend Stocks

What to Know About Canadian Pacific Railway Stock for 2025

CP stock has now gone through a major merger, so what do investors have to look forward to?

Read more »

ways to boost income
Dividend Stocks

Top Canadian Value Stocks I’d Buy for Dividend Growth and Appreciation

If you are looking for income and capital appreciation, here are three Canadian value stocks for a great total return…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Canadian Stock to Buy With $2,000 Right Now

The company’s powerful combination of growth, income, and value, positions it well to deliver solid returns, making it a smart…

Read more »

Transparent umbrella under heavy rain against water drops splash background. Rainy weather concept.
Dividend Stocks

This 10.6 Percent Dividend Stock Pays Cash Every Single Month

Are you looking to invest for a rainy day? This 10.6% dividend stock pays cash every month, irrespective of the…

Read more »