1 Big TFSA Change That Could Make You a Boatload of Money
Written by Robin Brown at The Motley Fool Canada
The Tax-Free Savings Account (TFSA) is set for some changes in 2024. Every year the TFSA contribution is increased by indexing to the CPI (Consumer Price Index). Last year, the annual TFSA contribution jumped 8% to $6,500.
While the decision has yet to be made by the CRA (Canada Revenue Agency), many tax experts believe the contribution limit could be increased to $7,000 in 2024. This is speculation, but the good news is that the CRA will still increase the total contribution limit by at least the same amount as last year.
No matter what, the total TFSA contribution limit will rise in 2024
That is $6,500 (or hopefully $7,000) that can be invested and earn income (capital gains, dividends, and interest) without any tax consequence. When you keep all your returns, you can re-invest more to more effectively compound your capital.
If you were 18 years old and a resident of Canada in 2009 and have never contributed, you can contribute a maximum amount of $88,000 to your TFSA today. Depending on the increase set for 2024, you could contribute a total between $94,500 and $95,000.
Tax-free compounding is a great way to build wealth
$6,500 compounded at an annual tax-free rate of return of 7% could become $25,000 in 20 years. $94,500 at that same rate of compounding could become as much as $365,000 in 20 years!
The point is, whenever you get a chance to invest tax-free, you should utilize it. You truly get to enjoy the complete effects of compounding. As Albert Einstein is believed to have said, “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.”
If you are thinking about what stocks could be a good bet for long-term TFSA compounding, here are two Canadian stocks to consider today.
A boring business that just keeps compounding
Alimentation Couche-Tard (TSX:ATD) has steadily compounded annual returns by 19% over the past five years and 21% over the past 10 years. Couche-Tard has a boring business operating convenience stores and gas stations. Yet, the company has differentiated itself as a wise capital allocator, a smart operator, and a great merchandiser.
The company has grown by consolidating smaller convenience operators around the globe. However, it has also been using operational prowess and scale to create operational leverage.
Over the past five years, earnings per share have grown close to the rate of its stock returns at 18.5%. Even if Couche-Tard’s growth slowed to just approximately 15% per annum, a $6,500 TFSA investment in this stock could double in a relatively quick five years.
A railroad for a long-term TFSA hold
Another stock that could be attractive for a TFSA is Canadian Pacific Kansas City Railway (TSX:CP). There are only a handful of railroads in North America. They each tend to dominate a market. As a result, they have very strong economic moats and great pricing power over long periods of time.
CPKC just became significantly larger after acquiring Kansas City Southern Railroad. Having that network now expands its reach from Canada, the U.S., and down into Mexico. In fact, it is the only rail line that has that type of direct service.
Management believes the merger could unlock above-industry growth for the next five years. They hope to double earnings over that time. The stock has pulled back recently, and that could be a good buying opportunity.
Even if CPKC only earned a 10% average return over the next five years (it could do better), a $6,500 TFSA investment could compound into $10,500 (an attractive 61% increase).
The post 1 Big TFSA Change That Could Make You a Boatload of Money appeared first on The Motley Fool Canada.
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Fool contributor Robin Brown has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alimentation Couche-Tard. The Motley Fool recommends Canadian Pacific Kansas City. The Motley Fool has a disclosure policy.
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