TFSA Passive Income: How Canadians Can Earn $470 Per Month Tax Free

Combining your TFSA with a covered call ETF can help create consistent, monthly, tax-free passive income.

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Do you dream about making passive income? Well, it turns out that the conventional methods like running an Airbnb, managing a rental property, or even loaning out your car still involve some work. With these methods, you can’t exactly sit back and collect a paycheque.

The alternative is harnessing your Tax-Free Savings Account, or TFSA and optimizing it for income generation. Because dividends earned in a TFSA are tax free and can be withdrawn tax free, the TFSA is an ideal vehicle for passive monthly income generation.

To optimize a TFSA for monthly income, we have to select the right assets. Fortunately, the Canadian exchange-traded fund (ETF) industry has a variety of choices that are well suited for this task. Let’s take a look at a pick I think might be suitable for passive monthly income investors.

Why the TFSA?

If your goal is tax-free monthly income, there really isn’t any substitute for the TFSA. This is because you must make withdrawals. If you make withdrawals from a taxable account or Registered Retirement Savings Plan (RRSP), you’ll have to pay tax.

With a TFSA, there’s no possibility of this. Any dividends or capital gains earned within the TFSA are tax-free, as are withdrawals. Therefore, maxing this account out early on is a good idea. If you turned 18 in 2009 and have never contributed, you can put in $88,000 in 2023.

Why an ETF?

There aren’t many stocks that pay monthly dividends in Canada. Most pay on a quarterly basis. Moreover, sinking a $88,000 TFSA into a single monthly dividend stock isn’t a good idea. By buying an ETF that holds many stocks, investors can better diversify.

A great ETF pick here is BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF (TSX:ZWA). This ETF holds 30 stocks that track the Dow Jones Industrial Average index and sells covered call options on it. This allows the ETF to generate high income in exchange for flat performance.

Because it uses covered calls, ZWA’s share price is unlikely to increase greatly, but it makes up for it with a very high yield that is paid monthly. If your goal is income over growth, this ETF could be ideal. Currently, ZWA has a yield of 6.43% and a management expense ratio of 0.72%.

The potential payoff

Assuming ZWA’s most recent January monthly distribution of $0.13 and current share price at time of writing of $24.28 remained consistent moving forward, an investor who buys $88,000 worth of ZWA could expect the following monthly payout:


Because ZWA only holds 30 U.S., blue-chip stocks, investors may want to diversify further with some Canadian dividend stock picks. Pipeline, bank, insurance, telecom, and utility stocks from the TSX can also offer excellent yields. Check out some of the Fool’s recommendations below!

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 Tony Dong has no position in any of the stocks mentioned. The Motley Fool recommends Airbnb. The Motley Fool has a disclosure policy.

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