How to Use Your TFSA to Earn $1,271 Per Year in Tax-Free Passive Income

Dividend income is usually where we focus our attention, but passive income comes from multiple sources investors should focus on.

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The Tax-Free Savings Account (TFSA) is an ideal place for Canadians to create a passive income stream. The TFSA now has contribution room of $88,000, if you were 18 when the program was introduced in 2009. Since then, more and more room has been added year after year, most recently by another $6,500.

All this room in your TFSA can then be devoted to a diverse portfolio, that would include some passive income stocks. So today, let’s go over how to put your TFSA to work to your advantage.

Make a budget, and automate it

To start off, if you have a TFSA but haven’t put anything in it, it’s time to change that. It can be a scary thing to do, however, especially in this economy. We’re constantly worried about whether we can take it out later on, but with a TFSA, you can take out as much as you want, anytime you want, tax free!

The only key here is that you likely cannot recontribute a large amount within the same year. Therefore, you’ll have to wait until more is added in the new year. That being said, this is why it’s a good idea to first make a budget, and then create automatic contributions to your TFSA.

By having a budget and making these automatic contributions, you shouldn’t need to take out cash unless you reach a goal, or have an emergency. Furthermore, you’ll be creating massive savings to work towards your passive income goals!

Start investing

Now a TFSA is great, but it’s just storage space unless you’re investing. Especially if you’re hoping to create some passive income. So to start, look for valuable investments you can hold for a long period of time. These would include essential services, real estate, financial institutions, infrastructure, energy, and more.

For example, let’s say you’re going with a company like Nutrien (TSX:NTR). Nutrien stock is immensely valuable, providing essential crop nutrients that the world needs. In fact, we need them now more than ever, with floods, wildfires and more damaging farmland and farmers need nutrients to get them back up and running.

Nutrien stock has also expanded its operations over the years, becoming a go-to investment for those seeking growth as the population explodes. Yet shares have dropped by almost half from all-time highs! Shares now trade at just 4.9 times earnings, with a dividend yield currently at 3.27%.

And invest again!

Now you could only invest in Nutrien stock every time you contribute. That’s definitely a great option. However, I would take it one step further and invest your dividend income as well! You’re creating passive income already, but creating even more by reinvesting your dividend income from this stock.

And remember, passive income in this case comes from two places. First, there is passive income coming in from dividends. That’s certainly where we usually focus our attention. However, the more unpredictable but potentially more lucrative passive income is through returns.

Should Nutrien stock reach its consensus price target by analysts, that would bring in a potential upside of 22% as of writing! Here is what your investment could look like in a year then, if you invested around $5,000.

NTR – today$8261$2.81$171.41quarterly$5,000
NTR – highs$10061$2.81$171.41quarterly$6,100

Now you’ve turned $5,000 into $6,100, plus $171.41 in dividends! That’s total passive income of $1,271.41 in just a year! Reinvest those dividends and you’ll create even more year after year that can be used to fund your dreams.

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 Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Nutrien. The Motley Fool has a disclosure policy.

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