What are some ways to maximize your income from the Canada Pension Plan (CPP) and Tax-Free Savings Account (TFSA)? Notably, CPP benefits are taxable, while TFSA earnings are (mostly) not. The only case you may be taxed is withholding tax on foreign dividends, and this tax is not recoverable. For example, if you earn qualified U.S. dividends in your TFSA, 15% will be withheld. So, for every $1,000 of qualified U.S. dividend income, you would only receive $850 in your TFSA.
Delay your CPP benefits if it makes sense
The Government of Canada website revealed that “the average monthly amount paid for a new retirement pension (at age 65) in April 2023 was $760.07.” By delaying your CPP benefits, you can increase your CPP income.
As an RBC document wrote in detail, “If you start CPP benefits before age 65, your CPP is permanently reduced by 0.6% for each month you receive it before age 65, including the month you turn 65 (a reduction of 7.2% per year) … If you start receiving a CPP retirement pension after age 65, your monthly CPP payments will permanently increase by 0.7% for each month you delay – up to a maximum increase of 42%, which you reach by age 70. In other words, if you begin receiving CPP in the month after your 70th birthday, your monthly CPP retirement benefit will be 42% higher than it would’ve been if you’d begun CPP at age 65.”
If you don’t need the CPP income now and you’re healthy and expect a long life expectancy based on family health history, by all means, you can choose to delay your CPP benefits.
Earn interest income in your TFSA
Consider earning interest income in your TFSA, since interest income is taxed at your marginal tax rate. In other words, you can consider high-interest savings accounts, Guaranteed Investment Certificates (GICs), and bonds that might provide the income you need. The best one-year GIC rate is about 5.5%.
Maximize your TFSA income with big dividends
If you have additional TFSA room, you can invest in solid dividend stocks for consistent and even growing income. Some popular high-yield dividend stocks for retirees include Enbridge (TSX:ENB), BCE (TSX:BCE), and Canadian Imperial Bank of Commerce (TSX:CM). At writing, they offer dividend yields of about 7.2%, 6.7%, and 6%, respectively.
These high-yield stocks have been weighed by a higher interest rate and potentially recessionary environment. They are currently reasonably valued for income. Just note that, unlike GICs that guarantee the safety of your principal, stock prices can be quite volatile. Therefore, you will lose money if you sell at a stock price lower than you purchased shares at. However, in the long run, stock prices should more or less follow the underlying company’s profits. If profits rise over time, the stock price should rise over time as well.
Enbridge can grow its dividends by about 3% per year. This growth could jump to about 5% post-2025. A 3% growth rate represents approximated total returns of about 10%. BCE has been super consistent in growing its dividend by about 5% annually in the last 10 years. CIBC’s dividend growth has been more lumpy, because the business is more sensitive to the economic cycle, but it still managed to achieve a solid 10-year dividend-growth rate of 6.1%.
