How to Use Your TFSA to Double That Annual $7,000 Contribution

The Tax-Free Savings Account (TFSA) is perhaps the best investment vehicle for the distinguished Canadian stock market investor. Generally, Canadians treat the account as a mattress that they can hide all their savings under. However, savvier Canadians use it far better by including other qualified investments in the registered account.

The real power of the TFSA is not in how much you can add to it in savings for tax-free withdrawals. Rather, it is how the returns on your holdings in the account are tax-free and how it can grow your wealth in the long run. By being smart with the additional $7,000 of contribution room in the TFSA, you can effectively double the value of your investment without adding another penny from your paycheck to the account.

Instead of simply using it for savings, turning the TFSA into a machine that grows your wealth automatically is a possibility. If you have long-term financial goals, the risk tolerance to weather cycles of short-term volatility, and the discipline to remain invested, the TFSA can be the best tool you can use as an investor.

Using stocks to maximize the returns

The TFSA was introduced in 2009, and since then, the government has added more contribution room for Canadians to add to their holdings in that account. Suppose you were eligible to contribute to a TFSA since its inception. In that case, the cumulative contribution room available after the 2026 update would be $109,000.

If you add a holding that can yield around 4%, in about a year and a half, the tax-free returns can easily hit the $7,000 mark. The key to achieving the ability to double your contribution is investing in assets that provide dividends that combine with capital appreciation to accelerate your overall wealth growth.

To this end, you need to seek companies with solid payout ratios, durable earnings growth, and a proven track record of dividend hikes.

Brookfield Asset Management

Brookfield Asset Management (TSX:BAM) is a $97.49 billion market-cap stock that fits the bill for such investments. Brookfield engages in providing alternative asset management services across virtually every sector of the economy worldwide. Due to its diversified nature, BAM stock sits at the intersection of several powerful trends that are acting as tailwinds in the economy.

Artificial intelligence (AI) is perhaps the most powerful trend these days, and AI-driven infrastructure and grid modernization are aspects that BAM is deeply focused on. Brookfield Asset Management has roughly US$600 billion in assets under its management. With around 87% of the fee-bearing capital locked in as long-term capital.

The business model lets BAM provide excellent visibility to investors in terms of fee growth and future cash flows.

Foolish takeaway

If you are an investor seeking long-term double-digit growth, the fee-related and capital-light model of Brookfield Asset Management offers an excellent holding to consider for your self-directed TFSA portfolio. Reinvesting dividends over the years can help you unlock the power of compounding to accelerate your wealth growth.

As of this writing, BAM stock trades for $59.51 per share. Down by over 30% from its all-time highs, it might be the best time to invest in its shares to capture capital gains on its recovery and beyond.

The post How to Use Your TFSA to Double That Annual $7,000 Contribution appeared first on The Motley Fool Canada.

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More reading

• 2 Dividend Stocks to Hold for the Next 5 Years
• 2 Canadian Stocks Built to Profit When the TSX Heats Up
• TFSA Millionaire Goals: Here’s How Much You Should Save Monthly
• 2 Canadian Stocks That Could Turn $100,000 Into $1 Million
• Undervalued Canadian Stocks to Buy Now

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Brookfield Asset Management. The Motley Fool has a disclosure policy.