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How to Grow a Million-Dollar TFSA (Using Index Funds)

Jake - Author/Founder

Hi. I'm Jake, a frugal Canadian Engineer. I believe you can build a great life through frugal living and index investing.

Since age 20, I’ve been (slowly) working towards my goal of a one-million-dollar TFSA. I want to show you that a million-dollar TFSA is possible after 30 years of investing. 

Even better, someone who starts investing at age 18 can expect $2,600,000 TFSA by age 60. This may be enough to fund retirement and provide a work-optional life (freedom). 

Using a 3% Safe Withdrawal Rate, a $2,600,000 TFSA can provide $78,000 of tax-free income for life, adjusted for inflation. That’s equivalent to $114,000/year of pre-tax income. 

You need not be an investing guru to grow a million-dollar TFSA. Instead, you need the following: 

  • To spend less than you earn to max TFSA contributions;
  • To invest in a globally diversified index fund; 
  • The ability to keep your TFSA money invested for the long-haul; and
  • The emotional fortitude to endure market crashes without panic selling.

Table of Contents

How The TFSA Works

The income produced by investments held inside the TFSA is tax-free. That’s the benefit of the TFSA.

Unlike what the name “Tax Free SAVINGS account” suggests, the TFSA is an investing account. It’s not just a savings account. 

Three types of investment income can be produced inside the TFSA: 

  • Interest Income from bonds, GICs, or Savings Accounts. 
  • Dividend Income from stocks. 
  • Capital Gains Income when an asset increases in value and you sell it. 

There is a set limit on the amount you can contribute to the TFSA each year. Without a limit, the TFSA would disproportionately benefit the most wealthy Canadians. 

The Road To a Million Dollar TFSA

Let’s look at the real-life situation with George, who opened his TFSA when the account first came out in 2009.

Since opening his account, George:

  • Maxed his annual contributions; and

Let’s follow George along a 40-year journey of TFSA investing. We will find George reaches a $1,000,000 TFSA by age 49. 

But it gets better – wait to see what George’s TFSA value is at age 60.

Maxing TFSA From 2009 to 2023: A $200,000 TFSA

Between 2009 and December 2022, a global stock index fund averaged a 10% return. This accounts for the COVID crash and the ~17% crash in 2022. 

Over the 13 years, starting in 2009, George contributed $88,000. With investment growth, his TFSA amount is now $199,500! 

TFSA Growth from 2009 to 2023 in an Index Fun d

Below you can see George’s TFSA growth in graph form. Note how the green line is starting to show upwards curvature … compounding is starting to take hold. 

George is 32 in 2023 and has $199,500 in his TFSA. But what happens if he continues to max his TFSA and invest in an index fund? This is where it gets fun. 

Compounding Towards a Million Dollar TFSA

If George keeps maxing the TFSA and investing in a globally diverse stock index fund, he can expect:

  •  A million-dollar TFSA by age 49; and
  • A $2,600,000 TFSA by age 60. 
At age 49, George contributed $228,400 over the last 31 years. Investment growth accounted for $771,600. 

Check out the curvature of the green line! The power of compound growth is generating George’s wealth. At age 50, his TFSA contributions mean less. Geroge’s money is working harder than he can.

By age 60, George has contributed $358,000 to his TFSA, and his TFSA value is $2,598,000. The additional $2,240,000 came from investment growth.

To build this model for George’s TFSA, I used some assumptions.

First, I assumed an 8% annual return starting in 2023. This is a more reasonable long-term expectation based on the last 123 years of global stock returns. The more exceptional returns that occurred during the 13 years between 2009 and December 2022 are not normal.

Second, I assumed that the annual TFSA contribution room allowed by the CRA grows with inflation at 2.5% per year. 

Now let’s look at the income that the TFSA could produce to fund retirement.

Income From The Million Dollar TFSA

Using a 3% safe withdrawal rate, a one million-dollar TFSA can produce $30,000 of investment income each year, adjusted for inflation, until you die. Because the investment income is produced inside the TFSA, it is tax-free!

With a $2,600,000 TFSA, George can expect to pull $78,000 of investment income each year for the rest of his life (3%*$2.6M = $78,000). For reference, you must earn $114,000 to see $78,000 of after-tax income in Ontario. 

It is reasonable for the TFSA alone to draw income to fund a lifestyle, also known as financial independence and/or retirement. 

You may wonder, how do I receive income from investments in my TFSA? Investment income can be produced in these three ways:

  • Selling off index fund shares for capital gains;
  • Cash dividend income from the stocks in the underlying index fund; and
  • Interest income produced by bond index funds.
For stocks, due to dividend irrelevance, it doesn’t matter if you sell shares or receive dividends—it results in the same outcome (less commission fees).  

5 Tips to Reach A $1,000,000 TFSA

Growing a million-dollar TFSA is simple from a technical standpoint. Just max TFSA contributions and buy a single index fund. It takes 10 minutes per year. 

But this is hard when you factor in human behaviour.

1. Generate a Robust Gap Between Income/Expenses

The cost of living crisis is identified as the #1 risk in the World Economic Forum Global Risk Report

Therefore, it’s harder than ever to produce a gap between income and expenses. It is this gap that fuels the personal finance journey

To max the TFSA, it’s critical to control spending. In addition, it’s helpful to pursue a higher income through investment in your competencies.

2. Have an Emergency Fund

If your car needs a new engine, how will you fund it? 

You don’t want to rely on debt. And you also don’t want to dip into the TFSA. The aim is to leave investments in your TFSA alone to compound!

A fully funded emergency fund helps you remain invested, plus it helps you sleep well at night. A robust emergency fund equals 3-6 months of essential expenses held in CASH. 

3. Fund Short-Term Savings First

Are you saving for an upcoming wedding, a new car, or a home down payment? 

I’ll assume that all of your TFSA room is devoted to long-term investments to grow a million-dollar TFSA. 

You want to avoid pulling from your TFSA investments when the expense comes due. In addition, you don’t want to need to take on debt to fund the expense. Therefore savings goals must be saved for ahead of time (with sinking funds). 

Otherwise, you would need to dip into your TFSA to fund the expense, interrupting compounding and putting your target a $1,000,000 TFSA at risk. 

Down payment money can remain in a First Home Savings Account or in the RRSP for use of the Home Buyers Plan. 

By keeping short-term savings outside of the TFSA, you protect TFSA’s room for higher-returning assets like stocks. 

4. Remain Calm

During your time investing, the market will crash, probably multiple times. This will be uncomfortable.

For example, even a globally diversified stock portfolio should be expected to crash by over 50% during a 30 year investing period.

It’s hard to watch hundreds of thousands of dollars disappear in your TFSA. If you can’t tolerate that, consider adding bonds to your portfolio. For more, read about how to determine your risk tolerance. 

You can’t predict crashes. Emotional discomfort is the price you pay to reap long-run compounded returns. 

5. Use Index Funds: Keep it Simple

It is accepted by academics that index funds optimize returns for a given level of risk. They are the ideal investing approach for most investors. 

For example, a total market index fund can be expected to beat over 90% of actively managed funds in the long term. In fact, over the last 20 years, 92% of US mutual funds underperformed the market (pg 9 of the linked report).  

To learn more, I wrote a post on the top 7 Benefits of Index Funds. Commission based advisors do not make money by selling index funds. Listen to the evidence, not the advisor who is incentivized to sell you high-fee products. 

Constraints on a Million Dollar TFSA

Buying a house is arguably the most significant constraint on a million-dollar TFSA. Why? 

Because you will likely withdraw money from the TFSA to fund the downpayment, interrupting compounding.

In Canada, it’s hard enough to fund a downpayment with the crazy home prices. You would need a huge income or help from mom/dad to buy a  home without touching a maxed TFSA. 

For those who rent and invest, the million-dollar TFSA is more probable. This reminds me that you CAN grow wealth without owning a home, as I discuss here

Conclusion

You won’t be able to build a $1,000,000 TFSA by holding cash in the account. It would take over 100 years. 

Contrary to popular belief:

  • The TFSA is not an investment. The TFSA is an account. 
  • The TFSA is not a “savings account.” It’s an investment account. 

The TFSA provides value when you hold investments in the account, such as stocks and bonds. Income generated from these investments is not taxed in the TFSA. Not only do investments compound tax-free, but you can pull them from the account tax free. 

By consistently maxing the TFSA and investing in index funds, you can expect to grow a million dollar TFSA. The key is starting early enough to allow compound growth to work its magic. 

For more on what to do after you max the TFSA, check out the post TFSA Maxed: Now What. 

Jake out.