How long would it take to turn $80,000 into $1,000,000 in registered accounts with stocks, options or private mortgages?
Why $80,000? Right now (as of April 2022) the most you can have in a TFSA is $81,500. Now, if you’ve been regularly maxing out your RRSP, you could have a lot more in there.
But if you have at least $80,000 in registered accounts, let’s look at how long it would take to reach $1,000,000 given historical returns from stocks, options and private mortgages.
IMPORTANT NOTE: We are not making any recommendations here. This article is purely for educational purposes. Make sure to complete your own due diligence before investing in anything.
Let’s dive in!
First, what are registered accounts?
Tax Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP) are registered accounts that give you specific tax advantages when you invest in them.
You can buy stocks, bonds, options, mutual funds, exchange traded funds (ETFs), guaranteed income certificates (GICs), treasury bills, and other investment instruments.
You can also use cash in your registered accounts to lend on private mortgages.
Generally, the higher yield investments are stock, options, and private mortgages.
Why invest in registered accounts?
Both your TFSA and RRSP have contribution limits, if you deposit more than you’re allowed, you get taxed on that overage amount. But any profit you make in those accounts from your investmenting is tax free.
Each registered account has other unique advantages.
When you deposit cash into an RRSP, that amount can be claimed as a tax deduction. Now, when you withdraw cash from your RRSPs, the amount you withdraw has to be claimed as income on that year’s tax return.
RRSPs are a way to “defer” taxes. You claim a deduction this year, but pay taxes later when the money is withdrawn. The intent is that you don’t withdraw money from your RRSPs until you retire, when you’re not making as much money, putting you in a lower tax bracket.
On the other hand, TFSAs let you withdraw as much as you want without being taxed. However, you don’t get to claim any tax deductions when you deposit cash into your TFSA. And the contribution limit for your TFSA is significantly smaller than your RRSP.
That being said, if you turned $80,000 into $1,000,000 over the course of 20 or 30 years in your TFSA, that $920,000 profit is tax free. You can withdraw that amount without paying taxes.
Ok, so how do you turn $80,000 into $1,000,000 in registered accounts?
Let’s look at stocks first…
Buying and selling stocks in registered accounts
As long as a stock is listed on a “designated stock exchange,” it qualifies as an investment in your registered accounts. Here’s a list of designated stock exchanges from the Canadian government (you have to scroll to the bottom of that page to find the list).
Because there are millions of companies to invest in, we’re going to simplify things for this article.
Warren Buffet, the most successful investor in history, says that you could do a lot worse than buying shares in funds that follow the market.
So, we’ll use the Vanguard Total Stock Market ETF (VTI) for this example. VTI is an exchange traded fund (ETF) managed by a company called Vanguard that follows over 4000 companies in the United States. This fund manages over $1.3 Trillion dollars, so hopefully that means it has some weight and staying power.
Here’s VTI’s growth since it started in May 2001:
OK. Time for some math.
298% growth / 21 years
= 14.19% / year average return
Let’s plunk these numbers into the Ontario Securities Commission’s Compound Interest Calculator:
Starting with $80,000 and assuming 14.19% annual return, you cross the $1,000,000 in 20 years.
There are quite a few assumptions here:
- We know every year won’t return 14.19%. That’s just an average based on past performance. That doesn’t guarantee what will happen in the next 20 years.
- This doesn’t take into account future deposits into your registered accounts or VTI’s 1.3% dividend yield.
- This assumes that VTI will be available to invest in for the next 20 years. Although it’s hard to see why VTI would fold right now, its continued existence is not guaranteed.
Buying and selling options in registered accounts
Stock options are limited in registered accounts, but one strategy can boost returns on stock you already hold.
“Covered calls” are call option contracts that let you collect a premium up front when you promise to sell your shares to someone else at a specific strike price, by a certain expiry date.
If you want to learn more about covered calls, read more about them in Options for Beginners Part 2 and Part 3. We’ll continue on in this article assuming you have a basic understanding of covered calls.
And let’s stick with VTI as an example, for consistency and simplicity.
And now, more math:
Current price of VTI = $226.70 / share
$80,000 / $226.70 = 352 shares
300 shares = 3 covered call contracts
So you could buy 352 shares of VTI right now with $80,000. Remember, a covered call contract can only be sold for 100 shares at a time, so you could sell 3 contracts to start with.
It’s tricky to say how much premium you can consistently collect. Option premiums fluctuate all the time. Based on today’s prices, let’s say you can sell a 30 day contract for $1 per share. That’s $100 total per contract and $300 total for 3 contracts.
$100 premium x 3 contracts = $300 every 30 days
$300 x 12 months = $3600 annually
$3600 / $80,000 = 4.5% return
Now, assuming you don’t have to sell your shares at all during the year, you could earn another 4.5%. That’s on top of the 14.19% average appreciation in share price each year.
So your total return if you’re selling covered calls is 18.69%. Let’s plunk that into the calculator.
You could reach $1,000,000 in 15 years if you sell covered calls on 300 shares of VTI each year.
BIG NOTE: Because you’re collecting cash premiums from the covered calls, you can buy more shares and increase your returns each year. That isn’t accounted for in this chart. AND VTI has an annual dividend yield of 1.3% right now. We aren’t counting that either.
Here are 3 big caveats to consider when selling covered calls:
- Premium pricing fluctuates a lot. So one month you might be able to collect $1 / share, the next it may only be $0.50. The month after that may be $1.50. It’s impossible to say how much you’ll collect for each contract.
- If the price rises quickly and closes above your strike price when the contract expires, your shares will get “called away.” You sell them for the price you set in the beginning, which should be a profit anway. It just means you have to buy shares again to continue on.
- If the price drops significantly, you keep the premium, but it will be hard to sell another covered call again at the same strike price for the same premium. Now, you’ll probably only have this problem for a little while. After a few years, your original purchase price will be pretty cheap, even when the shares dip.
This strategy is a part of what we call “Stock Hacking.” It can be a solid side hustle if you know what you’re doing! You can have a free case study we put together that compares stock hacking to real estate investing, MLM, and Amazon eCommerce. Click here to download your case study now.
Lending on private mortgages in registered accounts
Two really important elements need to be in place for private mortgages to work for you:
- A trustworthy and competent mortgage broker.
- A reliable borrower.
If you can get those two elements arranged, private mortgages can be a dependable source of passive income.
Ratehub.ca says that interest rates on private mortgages vary from 10% – 18%. We haven’t heard of too many 18% private mortgages among our clients. And with banks offering such low rates right now, sometimes private interest rates can be as low as 8% or 9%.
But let’s stick the median in Ratehub’s range, 14%.
Time periods for private mortgages can be anywhere from 3 months to 3 years or more. For this example we’ll say you’re able to complete 1 mortgage each year on average.
The result is very similar to VTI. If you start with $80,000, you’ll cross the $1,000,000 mark in 20 years if you can average 14% each year.
Again, there are several caveats, especially when it comes to private mortgages:
- Not every mortgage will be 14%. We’re just averaging that out.
- There’s no “VTI” when it comes to private mortgages. VTI has a 21 year history, is diversified across over 4000 companies, and has over $1.3 Trillion entrusted to it. It will be hard to find that kind of confidence in private mortgages.
- The turnaround time for a new mortgage can take up to 2 weeks. Just because you successfully complete a 9 month mortgage, doesn’t mean you’ll find another reliable borrower right away.
- You likely won’t be able to invest all of your available cash. Just because you have $80,000 available, doesn’t mean you’ll find someone who needs to borrow exactly $80,000.
- If the borrower defaults on their mortgage, you don’t get paid right away. Your cash will be tied up in legal proceedings for a while. In the end, you’ll either lose some of your investment, or end up owning a property you never intended to buy. Now, owning real estate is a great way to build wealth. But it’s also work. So be prepared, just in case.
What do I do with this information?
First of all, where are your TFSA and RRSP funds right now? Do you control them?
Second, do you want to take a more active role in managing your registered accounts?
If so, how active do you want to be?
Buying and holding stocks can be the most passive form of investing. Selling covered calls requires more involvement. Private mortgages are passive until someone defaults. Then you have work to do.
This is just an introduction to your options. There’s a whole world of possibilities out there.
If you want to continue your education, make sure you sign up for our Stock Hacker Report. It’s a weekly newsletter with stock and option education.
Hope to see you soon!
Your fellow Stock Hackers,
🍒Cherry & Erwin
P.S. These stock options strategies make a great side hustle. If you’re interested in finding a new side hustle, we’ve put together a new case study that examines the four most popular side hustles for passive income in Canada. You can download this case study for FREE right now if you sign up for our email newsletter.