How to Use a TFSA to Earn $250 Per Month in Tax-Free Passive Income

People are searching for ways to boost income on savings to offset rising living costs. The trick is to increase earnings without paying more tax.

| More on:
woman data analyze

Image source: Getty Images.

People are searching for ways to boost income on savings to offset rising living costs. The trick is to increase earnings without being pushed into a higher tax bracket. Fortunately, a Tax-Free Savings Account (TFSA) offers investors a way to generate tax-free passive income.

GICs or dividend stocks

Soaring interest rates make servicing debt more expensive, but the upside to rate hikes is a jump in the rates savers can get from Guaranteed Investment Certificates (GICs). In fact, GIC rates are now at their highest levels in years, paying above 5%. This gives investors a chance to earn attractive risk-free returns on fixed-rate terms of up to five years.

GICs, however, might not be the best choice if you need emergency access to the principal investment in the TFSA. In addition, rates might go even higher, so locking in for several years could result in missed opportunities for better returns.

Dividend stocks have the advantage of liquidity. You can sell the shares at any time to access your money. Top-quality dividend stocks tend to increase their distributions on a regular schedule, so the yield on the initial investment increases with each dividend hike. Great dividend stocks also tend to see the share price move higher over the long run, which can generate nice capital gains.

The downside of owning stocks is the fact that share prices can fall below the purchase price, and companies that get into financial trouble sometimes cut or eliminate their dividend payments. Investors have to be comfortable with the risk associated with owning stocks when deciding on the investments they want to hold inside their TFSA.

At the moment, many good dividend stocks trade at discounted prices and offer dividend yields that are above GIC rates.

TFSA limit

The TFSA limit in 2023 is $6,500. This brings the cumulative maximum TFSA contribution space to $88,000. Investors will see the TFSA limit increase by at least $6,500 in 2024.

Unused contribution space can be carried forward, and any funds removed from the TFSA open up new contribution space in the next calendar year. This provides TFSA investors with good flexibility to manage their savings.

Good stocks to buy for passive income

Enbridge (TSX:ENB) is one example of a top dividend-growth stock that now offers a great dividend yield.

The share price is down considerably over the past year due to the impact of rising interest rates. Energy infrastructure is a capital-intensive business, and firms use debt as part of their funding solution for growth projects. Higher borrowing costs can put a pinch on cash available for dividends and share buybacks.

In Enbridge’s case, the pullback in the stock price is probably overdone. The company’s $17 billion capital program is expected to support gains in earnings and distributable cash flow over the next few years. Enbridge can also make strategic acquisitions to boost revenue.

ENB stock currently offers a dividend yield of 7.3%. That’s attractive for a company that has increased the distribution for 28 consecutive years.

The bottom line on TFSA passive income

Investors can put together a diversified portfolio of GICs and high-yield dividend stocks today that would generate an average yield of 6%.

On a TFSA of $50,000, this would generate $3,000 per year in tax-free passive income. That works out to $250 per month!

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. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Enbridge.

More on Dividend Stocks

Canadian Dollars
Dividend Stocks

Buy 734 Shares of This Top Dividend Stock for $9,574 a Year in Passive Income

Are you looking to earn regular income? Now is an opportune time to buy Dividend Aristocrats at discounts and accelerate…

Read more »

A plant grows from coins.
Dividend Stocks

This Ultra-High Yield Stock Just Hit a 52-Week Low, and it’s Still a Buy Today

Enbridge Inc (TSX:ENB) stock recently hit a 52-week low. Here's why.

Read more »

Payday ringed on a calendar
Dividend Stocks

This 6% Dividend Stock Pays Cash Every Month

Are you looking to earn cash every month from October 15 onwards? This 6% dividend stock gives you monthly payouts.

Read more »

Person slides down a stair handrail
Dividend Stocks

With a 7.6% Dividend, This TSX Stock Is One to Buy Now and Hold for Decades

Now is an opportune time to invest in this no-brainer TSX stock and get +$30 extra dividend for decades on…

Read more »

Portrait of woman having fun in the street.
Dividend Stocks

CPP Benefits Will Be Higher for Millennials and Gen Z

Older Canadians won't get enhanced CPP, but they may invest in dividend stocks like Royal Bank of Canada (TSX:RY).

Read more »

A plant grows from coins.
Dividend Stocks

The Best Dividend Stocks in Canada Right Now

Seeking to give a boost to your income portfolio, consider investing in these best Canadian dividend stocks.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Retirees: Want Fast-Growing Passive Income? Here Are 3 Long-Term Dividend Stocks

Are you looking for dividend stocks that can grow their distributions very quickly? Here are three long-term picks!

Read more »

dividends grow over time
Dividend Stocks

2 Top Dividend Stocks You Can Buy and Hold Forever

The market is full of great dividend stocks, but not all are long-term gems. Here are two options that you…

Read more »