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TFSA 101: How Retirees Can Earn an Extra $314.50 Per Month Without Triggering the OAS Clawback

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The TFSA offers Canadian retirees a great opportunity to generate tax-free earnings on savings that won’t put their Old Age Security pensions at risk of the CRA’s pension recovery tax.

TFSA limit increase in 2021

The TFSA limit increase is $6,000 for 2021. This bumps the cumulative maximum TFSA contribution room to $75,500. A retired couple would therefore have as much as $151,000 in space to create a steady tax-free income stream.

All interest, dividends, and capital gains earned inside the TFSA remain beyond the reach of the CRA. Investors can remove the full value of the profits to add to their other income. In the case of seniors, the CRA doesn’t apply the TFSA earnings towards the net world income calculation used to determine the OAS clawback.

When income tops a certain level, the Canada Revenue Agency imposes a 15% pension recovery tax on every dollar of earnings above the minimum amount. The minimum threshold for the 2020 income year was 79,054. So, a person with net world income of $89,054 in 2020 would bet hit with a $1,500 OAS clawback. This gets applied against their July 2021 to June 2022 OAS payments.

Company pensions, CPP, OAS, RRSP withdrawals, and RRIF payments are all considered taxable earnings and count towards the net world income calculation. Employment income from a part-time job or earnings on a rental property get added to the total. Income on investments held in taxable accounts also go into the mix.

As such, it doesn’t take long for a senior who gets a decent work pension to break through the $79,000 barrier.

Best income stocks to own in a TFSA

Owning stocks carries risk. The value of the share price can fall below your purchase price. In addition, dividends can be cut when a company runs into financial hardships.

However, GICs pay less than 1% these days, so there isn’t much choice other than top dividend stocks to get decent TFSA yield. Fortunately, the TSX Index is home to many great dividend payers that should be safe holdings in nearly all economic circumstance.

Let’s take a look at Toronto Dominion Bank (TSX:TD)(NYSE:TD) and BCE (TSX:BCE)(NYSE:BCE) to see why they might be interesting picks for a TFSA income fund.

Why TD stock is attractive for TFSA income

TD is Canada’s second-largest bank by market capitalization. It also one of the top 10 banks in the United States. This fact isn’t widely known, but TD invested billions of dollars over the past 15 years to acquire and build a significant U.S. presence. In fact, the branch network extends from Maine all the way down the east coast to Florida with more total locations than in Canada.

The American exposure gives investors a great way to benefit from U.S. economic growth through a Canadian stock. TD has one of the best dividend-growth rates on the TSX Index over the past 20 years and remains very profitable, despite the impact from the pandemic.

At the time of writing, the stock provides TFSA investors with a 4.4% dividend yield.

Is BCE stock still a good buy for seniors?

Seniors have always loved BCE for its reliable and generous dividend. The company looks a lot different today than in the past, but the stock still deserves to be a top pick for an income fund.

BCE enjoys a wide competitive moat. The company generates adequate free cash flow to support the dividend and has the power to raise the price on its core services when it needs extra cash. Low interest rates help BCE borrow at very cheap levels to fund network upgrades, so more cash should be available for investors.

The stock appears cheap right now and provides a solid 6% dividend yield.

The bottom line

TD and BCE deserve to be anchor stocks for a diversified TFSA income fund.

Retirees can easily put together a portfolio of top dividend stocks that would provide an average yield of 5% today. This would generate $3,775 per year in tax-free dividends on a $75,500 TFSA. That’s more than $314.50 per month that won’t put your OAS at risk of a clawback.

A retired couple could generate $629 per month in tax-free income by taking full advantage of their TFSA contribution space.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker owns shares of BCE and TD.

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