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There’s no shortage of savings accounts for Canadians to choose from today. However, if I had the chance to only contribute to one, it would be the Tax-Free Savings Account (TFSA).
All Canadians aged 18 years or older are eligible to contribute to a TFSA. There are, however, annual contribution limits to keep in mind. The limit in 2021 is $6,000 but that annual amount has fluctuated since the TFSA was introduced in 2009. The contribution limit for 2022 has already been confirmed to stay at $6,000.
If you were 18 years old in 2009, the total that you’d be eligible to contribute to your TFSA today is $75,500. Don’t worry if you’re behind on your TFSA savings. Any unused contributions can be carried over from year to year.
Tax-free gains in your TFSA
The reason the TFSA is my top savings account in Canada is for tax reasons. As the name suggests, there are tax benefits tied to the account. For instance, you can make withdrawals at any point in time, completely tax-free.
What investors really need to keep in mind is the fact that capital gains are not taxed, which means that any gains from your $6,000 contribution this year are completely free of being taxed.
Imagine if you had your TFSA maxed right now at $75,500. If you were earning an annual return of 8%, it would take just over 30 years for that to turn into one million dollars. And that’s without making any additional contributions along the way! The best part is, when you’re ready to withdraw funds from your million-dollar portfolio, there’s no need to pay any tax on those withdrawals.
Here are two Canadian stocks that I’d suggest holding in your TFSA if you’re looking to build a million-dollar portfolio.
Investing in Canadian stocks is how you can benefit from compounded gains
If you’re looking to earn a standard 8-10% annual return, I’d suggest investing in low-cost exchange-traded funds (ETF) that track a broad stock market index. An investment like that requires very little maintenance and is perfect for anyone new to the stock market.
For Canadians with a desire to have a more hands-on approach to investing, owning individual stocks provides the opportunity to earn far more than just a 10% annual return. There are plenty of TSX stocks that have consistently outperformed the Canadian market’s returns for years.
Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) and Royal Bank of Canada (TSX:RY)(NYSE:RY) are two solid long-term bets. Both companies are dependable investments that own impressive market-beating track records.
Brookfield Asset Management is as close to an ETF as you’ll find. The company owns and operates all kinds of different businesses across the globe. There aren’t many individual stocks as well-diversified as this one.
At a market cap nearing $200 billion, RBC is Canada’s largest bank and the second-largest stock on the TSX. Shares are up a market-crushing 190% over the past decade. And that’s not even including the bank’s 3% dividend yield.
Investing in broad-market ETFs is an excellent way to begin investing. And once you’re comfortable, I’d suggest adding individual stocks to your portfolio. That can help put you on the fast track to having a million-dollar TFSA portfolio.