Canadian retirees that currently collect Old Age Security (OAS) pensions are searching for ways to earn more income without being hit by the Canada Revenue Agency’s pension recovery tax.
What’s the scoop?
The CRA implements OAS clawbacks once a person’s net world income moves above a minimum threshold. The amount increases each tax year and is set at $79,054 for 2020. A 15% pension recovery tax is placed on net world income that is above the minimum threshold and continues up to the maximum income level of $128,137. At that point, the full OAS would be clawed back.
At first glance, you might think that $79,000 would be a high income level for retirees. It is certainly comfortable, but it can be reached quite easily when you consider all the potential income sources Canadian seniors might receive.
Many retirees have defined-benefit pensions from their previous employers. The OAS and CPP pensions are then added to total income, as are RRIF payments. In addition, people might have income from taxable investment accounts, part-time jobs, or rental properties. When you put all the income sources together, it doesn’t take long to hit the minimum threshold.
One way to boost retirement income is to generate the gains inside a Tax-Free Savings Account (TFSA). Since its inception in 2009, the TFSA contribution limit has grown to $69,500 per person. That means a retired couple has up to $139,000 in TFSA space to own investments such as GICs, bonds, and stocks to produce an income stream that isn’t taxed or counted toward the net world income calculation.
GICs and bonds offer very low returns right now, so many people are turning to dividend stocks to get better yield on their savings. The recent pullback in the stock market is giving investors an opportunity to buy top-quality dividend stocks at reasonable prices.
Let’s take a look at one reliable dividend stock that might be an interesting pick right now to start a balanced TFSA income fund.
Royal Bank of Canada
Royal Bank of Canada (TSX:RY)(NYSE:RY) is Canada’s largest bank by market capitalization and among the top 15 in the world. The company earned $12.9 billion in fiscal 2019 and just reported fiscal Q1 2020 adjusted profits of $3.5 billion.
Royal Bank’s size and financial strength enable it to make strategic acquisitions when opportunities arise. In addition, the bank has the means to make the required investments in digital technology to ensure it remains competitive in an industry where more people are becoming comfortable doing their banking and making payments using the mobile phones.
Royal Bank has a strong track record of dividend growth, and investors should see the payouts increase in line with targeted annual earnings-per-share gains of 7-10%.
The current payout provides a yield of 4.2%.
The bottom line
Royal Bank should be a solid buy-and-hold picks to anchor a diversified portfolio of top TSX Index dividend stocks. Earning an average yield of 4% on a basket of high-quality companies is easy to achieve right now.
On a $69,500 TFSA portfolio this would provide an individual senior with $2,780 per year in tax-free income that won’t put OAS payments at risk.
A couple could generate additional annual tax-free income of $5,560!
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Fool contributor Andrew Walker has no position in any stock mentioned.