How Retirees Can Use the TFSA to Get $373.50 Per Month in Tax-Free Passive Income for Life

Retirees can take advantage of their TFSA contribution space to build reliable tax-free streams of passive income that won’t put OAS payments at risk of a clawback.

| More on:
Senior couple at the lake having a picnic

Image source: Getty Images

Canadian pensioners now have as much as $81,500 in Tax-Free Savings Account (TFSA) contribution room they can use to generate reliable and growing tax-free income that won’t put their Old Age Security (OAS) pension payments at risk of a clawback.

TFSA benefit for seniors

The TFSA is a great investing tool for all Canadians over the age of 18, but the growth of the TFSA limit each year particularly helps high-income retirees who are receiving OAS payments.

Why?

TFSA income is not taxed or used by the CRA to calculate net world income when determining the OAS pension recovery tax, otherwise known as the OAS clawback.

Company pensions, Canada Pension Plan (CPP) payments, OAS, Registered Retirement Investment Fund (RRIF) payments, employment income, and income from investments held in taxable accounts all get added to the net world income total. As a result, it doesn’t take long for a retiree with a decent work pension to hit the OAS clawback threshold. In the 2022 income year, the number to watch is $81,761. Each dollar of net world income above that amount triggers a 15-cent reduction in the July 2023 to June 2024 OAS payment period.

This means someone with net world income of $91,761 in 2022 would see their total OAS reduced by $1,500 next year. That’s a big hit.

Taking full advantage of the TFSA contribution space is one way to avoid or at least minimize the OAS clawback.

Guaranteed Investment Certificate (GIC) rates are getting better, but buy-and-hold investors should still consider top dividend-growth stocks for TFSA passive income. The best dividend stocks deliver payout increases each year. This slowly raises the return on the initial investment. Dips in the share price can be used to add to the position. Top dividend stocks tend to see their share prices rise over the long haul.

Enbridge

Enbridge (TSX:ENB)(NYSE:ENB) currently offers a 6% dividend yield. That’s comfortably above the 5-year GIC rate of about 4.6% being offered by the big banks. Enbridge increased the dividend in each of the past 27 years, and investors should see the payout continue to grow by 3-5% per year over the medium term, supported by the $13 billion capital program.

Enbridge is benefitting from the rebound in the energy sector. The company moves 30% of the oil produced in Canada and the United States and is investing in terminals and new pipeline infrastructure to take advantage of growing international demand for North American oil and natural gas.

Enbridge spent US$3 billion last year to buy an oil export terminal in Texas. In addition, management recently reached a deal to take a 30% stake in the $5.1 billion Woodfibre liquified natural gas (LNG) project in British Columbia. LNG facilities cool natural gas to the point where is becomes liquid and can be put on ships and sent to foreign buyers. International natural gas prices are much higher than the price of the fuel in the domestic market and global natural gas demand is on the rise, as Europe seeks suppliers to replace Russia and utilities in Asia switch from coal and oil to natural gas to produce power.

Enbridge is a good stock to buy if you want exposure to the energy recovery without taking on the direct commodity risks associated with owning shares of the producers.

The bottom line on top TSX stocks to buy for passive income

Enbridge is just one example of a top TSX dividend stock that TFSA investors can buy today for reliable passive income. In fact, the market pullback is giving retirees a chance to build a portfolio of top Canadian dividend stocks that would quite easily produce an average yield of at least 5.5%.

This would generate $4,482.50 per year on a TFSA worth $81,500. That’s more than $373.50 per month in tax-free passive income that won’t put your OAS at risk of a clawback.

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.

The Motley Fool recommends Enbridge. Fool contributor Andrew Walker owns shares of Enbridge.

More on Dividend Stocks

rail train
Dividend Stocks

3 TSX Stocks I Own and Will Buy More of If the Stock Market Crashes

These TSX stocks may be down, but don't count them out. In fact, buy up as much as you can…

Read more »

stream movies at home
Dividend Stocks

3 TSX Stocks With High Dividend Yields

As markets continue to sell off, here are three of the best TSX dividend stocks you can buy to earn…

Read more »

analyze data
Dividend Stocks

Got $250? Here Are 3 Smart Stocks to Buy Now

Are you looking for some smart stocks to buy? Here are three options that offer growth and income that you…

Read more »

Profit dial turned up to maximum
Dividend Stocks

2 TSX Stocks to Buy With Dividends Yielding More Than 3%

These two TSX stocks offer ultra-high dividends and, more importantly, stability towards a solid future of passive-income payments.

Read more »

Female hand holding piggy bank. Save money and financial investment
Dividend Stocks

Passive Income: 3 Top TSX Stocks That Pay Dividends Monthly

Given their high yields, attractive valuations, and stable cash flows, these three TSX stocks are excellent buys for income-seeking investors.

Read more »

Man making notes on graphs and charts
Dividend Stocks

Put Your Cash to Work: 3 Cheap TSX Stocks (With Dividend Yields of +5%) to Buy Now

Make your money work for you. Earn over 5% dividend yields with these under-$20 stocks.

Read more »

edit Woman calculating figures next to a laptop
Dividend Stocks

2 Oversold TSX Stocks for TFSA and RRSP Investors to Buy Now

These top TSX dividend stocks look oversold.

Read more »

Pixelated acronym REIT made from cubes, mosaic pattern
Dividend Stocks

2 Top High-Yielding REITs to Beat Inflation

Real estate investors can beat the 7% inflation by investing in these two high-yielding REITs.

Read more »