Impossible to accumulate $1 million in a TFSA? Think again!

17 February 2022 by Sophie Paquet

In the course of my work, I notice that very few people maximize the full potential of their Tax-Free Savings Accounts, better known as TFSAs.

Many clients think this account is only for saving and not for investing for retirement. A safe, liquid investment in a TFSA is ideal for short-term needs, but investors with ambitions, long-term goals may want to consider an investment with higher return potential. Keep in mind that a TFSA is a powerful tool for creating wealth because investment income will never be taxed while you’re contributing to it or when you withdraw from it.

Three strategies for building up $1 million in a TFSA:

1) Start early:

As Albert Einstein used to say, “Compound interest is the most powerful force in the universe!” Listen to the advice of the great genius and start investing as soon as possible! A young millennial who maximizes their TFSA contributions has every chance of accumulating $1 million tax-free for their retirement. And there’s still time for investors in their thirties or forties to save up hundreds of thousands of dollars tax-free for their golden years.

2) Maximize your contributions every year:

Calculate your annual contribution room (external site). Contribution room is accumulated each year, and any unused room can be carried forward to future years. It’s not unusual to see TFSA accounts that have been maximized and invested in equities since 2009 grow to more than $120,000. These investors are on their way to a million!

3) Play to win:

In addition to investing early and contributing regularly, you need to choose investments with high growth potential to reach one million¹. Historically, long-term stock market returns average 10% annualized. By investing your TFSA account in a diversified equity portfolio with a more conservative 6% annualized return assumption, here’s what you could expect:

The potential value of your TFSA when you retire

This table assumes a TFSA maximized each year and an annualized rate of return of 6%. The TFSA annual contribution limit is indexed to an inflation rate of 2% and rounded to the nearest $500².

Million-dollar TFSA for retirement

One million in your TFSA could generate retirement income of $40,000 per year, completely tax-free, because TFSA withdrawals aren’t taxable. Plus, withdrawals have no impact on Old Age Security (OAS) benefits.

You can see why TFSAs have become an important part of a withdrawal strategy. Normally, we recommend withdrawing from this account last since income continues to accumulate in it tax-free. Plus, when you die, your heirs won’t have a tax burden to deal with as they would with RRSPs and non-registered investments.

Sophie Paquet

Senior Wealth Management Advisor and Portfolio Manager

National Bank Financial – Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF) and a trademark belonging to National Bank of Canada (NBC) used under licence by NBF. NBF is a member of the Canadian Investment Regulatory Organization (CIRO) and of the Canadian Investor Protection Fund (CIPF) and a wholly-owned subsidiary of NBC, which is a public company listed on the Toronto Stock Exchange (TSX: NA).

We have produced this outlook to provide you with our opinion on various investment solutions and considerations that may apply to your investment portfolio. This outlook reflects solely our opinions and not necessarily those of National Bank. We have endeavoured to apply our best judgment and professional experience in expressing our opinions as managers monitoring a broad spectrum of investments. This report therefore contains our informed opinion, and is not an analysis of research from National Bank Financial’s Research Department.

¹ Please consult your investment advisor before making an investment decision to assess your investor profile (i.e. your ability and willingness to take risks).

² Past performance is no guarantee of future returns.

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