TFSA Investors: Your Guide for 2021

Buying a high-growth tech stock like Shopify (TSX:SHOP)(NYSE:SHOP) in a TFSA could give you interesting returns without having to pay taxes on your gains.

| More on:

The TFSA was introduced in 2009 to allow all Canadians 18 years of age and over to invest in an investment vehicle where returns are tax exempt. An additional investment of $6,000 can be contributed as of January 1, 2021, for a lifetime total of $75,500.

Be careful not to exceed your contribution limit. You will have to pay hefty penalties if you contribute more than $75,500 to your TFSA. They will represent 1% of any overrun calculated each month. Keep your records up to date, as it’s easy to lose track of contributions made if you have TFSAs with multiple financial institutions.

Officially, the annual limit is adjusted for inflation by rounding it up in increments of $500. In other words, if inflation is 2% per year, you would expect the maximum to be $6,500 in four years.

Here are some important points to know about the TFSA.

What investments are eligible?

Permitted investment products are generally the same as those permitted in RRSPs or RESPs:

  • Cash
  • Mutual funds
  • Exchange-traded funds (ETFs)
  • Securities (shares listed on a designated stock exchange)
  • Guaranteed investment certificates (GICs)
  • Bonds
  • Certain shares of small business corporations

Investments that are better for you depend on your risk tolerance, your goals, and your time horizon.

Can you withdraw from your TFSA?

It is possible to withdraw some or all of the amounts invested in your TFSA to the extent that the chosen investment allows it.

But be careful. To deposit money back into your TFSA, you will then have to wait until after January 1 of the following year if you do not have enough unused rights. Otherwise, you will be subject to a penalty. In other words, you won’t have a problem until you hit the maximum. And unlike an RRSP, a TFSA does not generate any tax on withdrawals, regardless of your salary.

Possible TFSA uses

If the RRSP is generally used to finance retirement, the TFSA is a versatile tool that allows you to carry out a multitude of projects while keeping your earnings tax-sheltered.

You could use your TFSA for an important project like the purchase of a car. That way, you won’t have to borrow money and pay interest.

Build an emergency fund is also a good idea. If you run your own business, having a well-funded TFSA can act as a lifeline when your business is in a downturn. And if you have kids, you know how much it costs. If you don’t have to use it, you’ll have amassed a nice nest egg that can be used for other purposes like your retirement plan.

If you invest for the long term, the stock market can provide you with interesting returns. Buying an ETF that gives you exposure to the TSX, like the iShares S&P/TSX 60 ETF, is a simple way to give you exposure to large Canadian companies. This ETF has a five-year CAGR close to 10%.

That’s great, but you could have higher returns by investing in individual stocks. Shopify (TSX:SHOP)(NYSE:SHOP) is one of those top-performing stocks that you might you want to have more exposure to. Shopify has a five-year CAGR close to 110%, beating the TSX by a wide margin. And buying it in your TFSA will allow you to profit from price appreciation without paying taxes.

While Shopify has surged 185% in 2020, there is still more upside for the e-commerce platform in 2021. Why? The use of the e-commerce platform has increased big time during the pandemic because of the lockdowns. As the pandemic is still not under control and many parts of the country are in lockdown, people will keep shopping online. And that trend should stay, even when the pandemic is behind us, as online shopping is a convenient way to shop. So, I’m confident Shopify can keep delivering strong gains for many years.

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 Stephanie Bedard-Chateauneuf has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify.

More on Tech Stocks

A person uses and AI chat bot
Tech Stocks

AI Where No One’s Looking: Seize Growth in These Canadian Stocks Before the Market Catches Up

Beyond flashy headlines about generative AI, these two Canadian AI stocks could deliver strong returns for investors who are willing…

Read more »

Data center servers IT workers
Tech Stocks

Better Buy: Shopify Stock or Constellation Software?

Let's dive into whether Shopify (TSX:SHOP) or Constellation Software (TSX:CSU) are the better options for growth investors in this current…

Read more »

nvidia headquarters with nvidia sign in front
Tech Stocks

Nvidia Just Delivered a Beat-and-Raise Quarter. There’s 1 Red Flag Investors Shouldn’t Ignore.

The chipmaker continued to benefit from robust demand for artificial intelligence (AI). But can it last?

Read more »

GettyImages-1473086836
Tech Stocks

Why Super Micro Computer Stock Is Soaring Today

The volatile stock is getting a boost from Nvidia.

Read more »

Snowflake logo in snowflake office on wall_snowflake-1
Tech Stocks

Here’s Why Snowflake Stock Skyrocketed Today

Shares of the data company are up 32% for the day.

Read more »

man touching magnifying glass button on floating search bar internet google search engine
Tech Stocks

Why Alphabet Stock Was Sliding Today

The parent company of Google is facing heat from U.S. regulators.

Read more »

chart reflected in eyeglass lenses
Tech Stocks

Top Canadian AI Stocks to Watch in 2025

Celestica (TSX:CLS) stock and another Canadian AI stock are worth watching closely this holiday season.

Read more »

Nvidia Voyager Headquarters
Tech Stocks

Why Nvidia Stock Rallied (Again) on Tuesday

The chipmaker is expected to report earnings this evening.

Read more »