I remember when tax free savings accounts were announced a few years ago. I thought to myself that it would be a great way to save money and not pay any tax on the interest I earned. Like most Canadians, I was oblivious the true potential that a TFSA could offer a smart investor. I remember I was offered an interest rate of 2.5% and within 6 months that rate dropped to below 1%.
Now that I have become “Financially Aware”, I invest my money in dividend paying stocks with a tax free trading account. By investing in stocks with proven dividend growth, my return will grow each year with each dividend increase. Last year my return was 3.5% and after a dividend increase last month, my return is now 4%.
On January 3rd I called my online broker and told them to transfer $5000 worth of BCE stock from my cash account to my tax free trading account. The amount of dividends that accumulated in my TFSA last year was $340. With my new contribution for 2011 my dividend total will be $575. It doesn’t matter how much the value of the stock goes down, I will still make $575 in dividend income.
I could take that money out at any time, but instead I’m going to re-invest it to buy more shares which will in turn pay me even more dividends. By contributing the maximum amount each year and re-investing the dividends, I will be able to turn a small amount of money into a nice chuck of retirement change thanks to the power of compounding; transforming my TFSA into a compounding dividend machine. If I need money for any reason I can withdraw the dividend income tax free, and not have to touch the principle investment. The longer I leave the dividends to be re-invested, the more money will be available the following year. In 20 years, I will have a growing tax-free income to possibly help pay for a child’s education or allow me an early retirement. The possibilities are endless.
I know not everyone can afford to make the maximum contribution of $5000 each year, but it’s a good idea to save as much as possible to utilize the potential of this amazing investing opportunity.