Compound Interest in Canada: How It Builds Wealth Tax-Free
Compound interest is the process by which investment returns earn their own returns over time, causing money to grow at an accelerating rate. Inside a TFSA, this growth is entirely tax-free — making it one of the most powerful wealth-building tools available to Canadians.
The difference is dramatic. With simple interest, you earn a return only on your original investment. With compound interest, you earn returns on your principal and on all previously accumulated returns. The longer you leave it, the faster it accelerates.
A Canadian example: invest $7,000 (one year of TFSA room) at a 7% average annual return. After 10 years, it grows to roughly $13,770. After 30 years, approximately $53,270 — over seven times your original contribution — and inside a TFSA, every dollar of that growth is tax-free on withdrawal.
The key variable is time. A 25-year-old who maxes their TFSA at $7,000/year for 10 years and then stops could end up with more at 65 than someone who starts at 40 and contributes for 25 years — purely because of the extra compounding runway.
Compounding also works against you. Canadian credit card rates of 19.99% to 22.99% compound aggressively. A $5,000 balance at 20% with minimum payments can take over 30 years to repay and cost more than triple the original amount in interest.
The most powerful strategy is also the simplest: start early, invest consistently in low-cost ETFs like XEQT or VEQT inside your TFSA and RRSP, and avoid withdrawing. Even $200/month into a TFSA can grow into six figures over 25 years at average market returns.
Richify Tip
Richify's AI agents help you visualise the compounding effect of your TFSA and RRSP contributions — showing exactly how small changes today translate into life-changing numbers at retirement.
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