Canadian savers are looking for ways to boost their take-home income without getting pushed into a higher marginal tax bracket. In the case of retirees who collect Old Ages Security (OAS), they want to avoid being hit with the OAS clawback. Fortunately, investors can use their self-directed Tax-Free Savings Accounts (TFSA) to generate income to achieve these goals.
The TFSA limit in 2023 is $6,500. It will be at least that amount again in 2024. The government indexes the TFSA limit to inflation and increases the TFSA limit by increments of $500.
Any unused contribution space received in a particular year can be carried forward to future years. The TFSA cumulative maximum contribution space per person has grown to $88,000 since the creation of the TFSA in 2009.
All income generated inside the TFSA is tax-free. Money removed from the TFSA during the year will open up equivalent new contribution room in the next calendar year. This is in addition to the regular TFSA limit.
TFSA investments for passive income
Owning stocks comes with risks. The share price can fluctuate significantly, and distributions sometimes get cut or eliminated if a company runs into financial difficulties. That being said, stocks that have good track records of dividend growth tend to boost the payouts in all economic conditions, and the share prices normally recover after a market correction. Stocks can be sold at any time to get access to the invested funds, so there is more flexibility. As dividends increase, the yield on the initial investment rises.
The pullback in the share prices of some top dividend stocks is starting to look overdone. Investors who can ride out the volatility now have a chance to get yields above 7% from several great Canadian dividend stocks. For example, Enbridge offers a yield of 7.6% at the time of writing and has increased the dividend annually for 28 years.
BCE increased its dividend by at least 5% in each of the past 15 years. The dividend provides a 7.25% yield at the current share price.
GICs now offer rates above 5% for terms of one year to five years. This might be good enough for investors to meet their income needs without taking on capital risk. As long as a person is comfortable not having access to the money during the term of the GIC, this is an attractive option.
The right mix between GICs and dividend stocks should be decided according to specific income needs and risk tolerance.
The bottom line on TFSA passive income
Retirees and other income investors can quite easily put together a diversified portfolio of GICs and top dividend stocks to get an average yield of at least 6% today. On a GIC of just $30,000, this would generate $1,800 per year in tax-free passive income that won’t bump you into a higher tax bracket or put OAS at risk of a clawback.