Canadian pensioners are searching for ways to boost their retirement income without getting bumped into a higher tax bracket or being hit with a clawback on their Old Age Security (OAS) payments.
TFSA rules
One option involves maximizing contribution room inside a Tax-Free Savings Account (TFSA) and holding a combination of Guaranteed Investment Certificates (GICs) and high-quality dividend stocks.
The TFSA contribution limit in 2023 is $6,500. This brings the total available TFSA space to $88,000 per person. A retired couple can therefore have up to $176,000 in savings earning tax-free income.
All interest, dividends, and capital gains generated inside the TFSA and removed as income are exempt from being taxed. In addition, the CRA doesn’t use the TFSA earnings when it calculates a person’s net world income, which is used to determine the OAS pension recovery tax.
This is a big deal for retirees who get decent taxable income from a work pension, in addition to CPP, OAS, and possibly Registered Retirement Income Fund (RRIF) payments. It doesn’t take long to hit the OAS clawback threshold, which is $86,912 for the 2023 income year.
TFSA withdrawals open up new contribution room in the next calendar year in addition to the regular TFSA limit increase.
Best TFSA investments?
GICs now offer rates above 5%. This makes them attractive enough to be a part of the TFSA holdings. In fact, if you don’t need access to the locked-in funds and can get by on the 5% return, it makes sense for GICs to be a big part of the portfolio right now.
Otherwise, investors who can handle some principal risk, want higher returns, or need access to the capital in the event of an emergency might want to consider buying top TSX dividend stocks.
Enbridge
Enbridge (TSX:ENB) is a good example of a top dividend-growth stock that offers a high yield and looks oversold at the current share price.
Enbridge trades near $49 at the time of writing. The stock was around $59 in June last year.
High interest rates will drive up borrowing costs for capital projects, and a recession could hit fuel demand, which would potentially reduce revenue on the oil pipelines. However, Enbridge’s earnings and distributable cash flow guidance suggest things are looking pretty good, even as the world faces some economic headwinds.
Management expects the current $17 billion capital program to help drive earnings per share and cash flow growth in the coming years. That should enable the board to extend the 28-year streak of consecutive annual dividend increases.
Investors who buy ENB stock at the current level can get a 7.2% dividend yield.
The bottom line on TFSA passive income
Pensioners can easily put together a portfolio of GICs and top TSX dividend stocks to generate an average yield of 6% today. On a TFSA of $88,000, this would provide $5,280 per year in tax-free passive income.
For couples, that’s $10,560 per year for an average of $880 per month in earnings that can go right into your pocket and won’t put OAS at risk of a clawback!
