How to Use Your TFSA to Double Your Annual Contribution

The Tax-Free Savings Account (TFSA) has been a blessing for Canadians, especially those who can make the most of the tax-sheltered account while aligning with the rules clearly outlined by the Canada Revenue Agency (CRA). Among the most important rules is the annual contribution limit.

With each new year, the CRA provides an update on the cap for annual contributions TFSA users can make to their accounts. It is reasonable for the CRA to expect account holders to work within those limits. Getting greedy due to the tax-sheltered status of the account and overcontributing to it breaks the rules.

However, doubling the amount without breaking the rules can impact the tax-sheltered status of your TFSA. The trick is to invest in dividend stocks and use dividend reinvestment to unlock the power of compounding and grow your investment (relatively) quickly.

After the 2026 update, the cumulative lifetime TFSA contribution limit stands at $109,000. However, Statistics Canada reports that roughly a tenth of TFSA users actually maximize their contribution limits, and the average TFSA balance per individual is around $38,500.

If you’re among the Canadians who have more available contribution room than you are utilizing, you’re not alone. Fortunately, you can cover the gap by investing in dividend stocks and reinvesting the dividends to purchase more shares of your current holdings, while adding more shares to your TFSA each year. This way, you can compound the growth and significantly increase the value of your initial investment.

Remember, while faster than holding cash or fixed-income assets, this growth takes years to materialize into solid returns. Patient investors can see massive rewards for showing discipline in the meantime.

Today, I will discuss a high-quality dividend stock that can be ideal for this purpose.

Enbridge

Enbridge Inc. (TSX:ENB) is quite simply one of the best dividend stocks to own on the TSX for many investors. Enbridge is a dividend stock boasting a 31-year track record of hiking its quarterly payouts to investors. The $168.9 billion market-cap stock is a giant in the Canadian energy infrastructure sector and plays a vital role in the North American economy.

Enbridge boasts an extensive portfolio of energy infrastructure assets that it uses to serve energy producers in Canada. It transports roughly a fifth of the crude and natural gas produced and consumed in the region. Since it charges based on volume, Enbridge stock enjoys a relative buffer against the impact of volatile commodity prices.

Enbridge also has growing renewable energy operations, and it boasts one of the largest utility businesses under its belt, adding long-term growth potential and steady and predictable cash flow into the mix to make it an even more attractive investment.

Foolish takeaway

It takes time for an initial investment to double. If you follow the Rule of 72, you can get a rough estimate for the time it will take to get two-fold returns. By dividing 72 by the annualized dividend yield, you get an idea of how many years it should take.

As of this writing, Enbridge stock trades for $77.34 per share and boasts a 5% dividend yield. This year’s contribution limit increase was $7,000. According to the Rule of 72, it will take approximately 14.3 years. However, this is a conservative figure. Enbridge stock also keeps increasing payouts and capital gains that can further accelerate wealth growth.

I think it might be a good time to invest in its shares and lock in the high-yielding dividends.

The post How to Use Your TFSA to Double Your Annual Contribution appeared first on The Motley Fool Canada.

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More reading

• Where I See Enbridge Stock Heading Over the Next 3 Years
• Where Will Enbridge Stock Be in 3 Years?
• 1 High-Yield Dividend Stock You Can Buy and Hold for a Decade
• The Best High-Yield Dividend Stocks to Buy Right Now for Unbeatable Income
• 4 TSX Dividend Stocks Retirees Might Want on Their Radar

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