Canadian seniors are searching for ways to get better returns on their savings without being pushed into a higher marginal tax bracket or getting hit by the Old Age Security (OAS) pension recovery tax, commonly known as the OAS clawback. Holding investments inside a Tax-Free Savings Account (TFSA) is one way to achieve this goal.
TFSA limit
The TFSA limit is $6,500 in 2023. This brings the maximum cumulative TFSA contribution space to $88,000 per person. The TFSA limit in 2024 will be at least another $6,500, giving retirees additional room to invest and earn passive income.
All interest, dividends, and capital gains generated inside a TFSA can go right into your pocket. The Canada Revenue Agency (CRA) does not tax TFSA income and does not use TFSA earnings as part of the net world income calculation that determines the OAS clawback.
Funds removed from the TFSA open up new equivalent contribution space in the next calendar year in addition to the regular TFSA limit. The size of the TFSA limit each year is indexed to inflation, with increases made in $500 increments.
OAS pension recovery tax
Seniors who receive OAS pensions need to keep an eye on their taxable income. The CRA implements a 15% OAS pension recovery tax on every dollar of net world income above a minimum threshold. In the 2023 income year this amount is $86,912.
For example, a person with net world income of $106,912 in 2023 would see their total OAS pension payments reduced by $3,000 in the July 2024 to June 2025 payment period. That’s a big hit that should be avoided, if possible.
Earnings from a company pension, Canada Pension Plan, OAS, Retirement Savings Plan withdrawal, Registered Retirement Income Fund, or investments held in taxable accounts all get added into the net world income calculation. Someone who has a decent work pension and receives full payments from the government pension can quite easily hit or exceed the OAS clawback threshold. As such, it makes sense to maximize TFSA investments before putting savings into taxable investments.
GICs or dividend stocks for TFSA passive income
Investors can get good rates on Guaranteed Investment Certificates (GICs) right now. This will only last as long as the government keeps interest rates at or above current levels. As soon as the Bank of Canada gets inflation under control, interest rates will likely drop, and that will lead to lower rates offered on GICs. For the moment, retirees can get GIC rates in the range of 5% to 5.5% from Canada Deposit Insurance Corporation (CDIC) members.
Dividend stocks carry risks. Share prices can be volatile. However, top TSX dividend-growth stocks normally bounce back from corrections, and investors typically get a dividend increase each year. That boosts the yield on your original investment. Over time, the annual dividend increases can really add up and elevate income considerably.
Several leading Canadian dividend stocks now trade at discounted prices and offer high yields. Pipeline giant Enbridge (TSX:ENB) and communications provider BCE (TSX:BCE) are good examples. Enbridge increased its dividend in each of the past 28 years and now provides a 7.5% dividend yield.
BCE has raised its dividend by at least 5% annually for the past 15 years and offers a 6.8% dividend yield at the time of writing.
The bottom line on TFSA passive income
Seniors can put together a diversified portfolio of GICs and top dividend stocks that would easily generate an average yield of 6% right now. On a TFSA of $88,000, this would provide $5,280 in annual tax-free passive income.
That’s an average of $440 per month that won’t put OAS pension payments at risk of a clawback.
