Retirees and other investors who rely on passive income from their savings are looking for ways to get better returns without being bumped into a higher marginal tax bracket or, in the case of seniors, getting hit with a clawback on their Old Age Security (OAS) pensions.
One strategy to achieve this goal involves holding high-yield investments inside a Tax-Free Savings Account (TFSA).
TFSA limit
The TFSA limit is $6,500 in 2023. This brings the cumulative maximum contribution space to $88,000 for anyone who has qualified every year since the inception of the TFSA in 2009. The government indexes the TFSA limit to inflation and makes increases to the TFSA limit in $500 increments. In 2024, the TFSA limit will be at least $6,500 but could jump to $7,000.
Unused TFSA contribution space can be carried forward to future years. In addition, the value of any funds removed from the TFSA in a year will open up equivalent new contribution space in the following calendar year.
Interest, dividends, and capital gains generated inside the TFSA are not taxable, so the full amount can go right into your pocket. Income from TFSA investments isn’t used by the Canada Revenue Agency to calculate net world income that determines the OAS pension recovery tax, also known as the OAS clawback.
TFSA investments for passive income
Investors with cash to put to work have a rare opportunity in the current market to get attractive interest rates from Guaranteed Investment Certificates (GICs) and high yields from top TSX dividend stocks.
The surge in interest rates could continue over the next few months, as the Bank of Canada fights to cool down the economy to bring inflation back to its 2% target. As such, current GIC rates above 5% should remain available through at least the end of the year and could even take a run at 6% for one-year or two-year terms. That’s attractive for an investment that carries zero risk to the invested capital as long as the GIC is issued by a Canada Deposit Insurance Corporation (CDIC) member and is within the $100,000 limit.
That being said, the top for interest rates is likely on the horizon. Investors might also want to consider buying leading dividend-growth stocks while they are out of favour and offer dividend yields that are above GIC rates. As soon as the Bank of Canada says it is done hiking interest rates, there could be a surge in the share prices of great dividend stocks.
Enbridge
Enbridge (TSX:ENB) is a good example of a top TSX dividend stock that looks oversold and offers a high yield. The board increased the dividend in each of the past 28 years. This is a great track record that should continue, supported by the anticipated revenue and cash flow boost from recently announced acquisitions and the capital program.
ENB stock trades near $45 per share at the time of writing compared to $59 at the high point last year.
Investors can now get a 7.9% yield from Enbridge stock.
The bottom line on TFSA passive income
Investors can quite easily put together a diversified portfolio of laddered GICs and quality high-yield TSX dividend stocks to get an average yield of 6% right now. On a TFSA of just $30,000, this would generate annual tax-free passive income of $1,800. That works out to an average of $150 per month!
