How a TFSA Can Earn $864 Per Year (or More!) in Tax-Free Passive Income

Passive income doesn’t have to be hard to come by if you’re looking at it the right way! And the TFSA is the best way to earn it.

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The Tax-Free Savings Account (TFSA) has long been a strong investment strategy for Canadians. Since coming out in 2009, Canadian investors have made buckets of cash by using the investment tool. However, even if you didn’t get started in 2009 and are just starting now, there’s still time to make a ton of passive income.

Getting started

The best way to start making passive income is to just start. To do that, you’re going to need to open a TFSA through a broker or your financial institution. But don’t just start investing willy-nilly. Instead, meet with your financial advisor and come up with goals.

These goals will help you stay focused. Having goals is the best way to actually achieve those goals and therefore achieve wealth. If you’re looking to create three to six months of emergency funds, that’s a great goal. If you’re looking to have a certain amount by retirement, again, it is a great goal. You can also do these all at once! This is why your financial advisor will be so helpful.

A great strategy is to set up automated contributions. These allow you to put cash away without even thinking about it. Then simply invest on a regular basis in the stocks, bonds, Guaranteed Investment Certificates (GIC), and other investments you’ve chosen with your advisor.

Have some set aside

Overall, your goals should include these GICs and other safe investments that will allow slow but stable growth. However, it’s totally fine to have, say, 5-10% set aside for more riskier investments — to have fun and try and make some extra passive income!

And when I say passive income, I’m not talking about just dividends. Those are great, certainly. But you also need to include returns in that amount. Passive income, after all, is income created from doing absolutely nothing. Returns certainly fall into that category.

What’s a great place to start in terms of these passive-income stocks? I would consider a strong stock like Canadian Pacific Kansas City (TSX:CP).

Get it all

CP stock is a solid choice thanks to its recent acquisition of Kansas City Southern Railway. This railway allows CP stock to run from Canada down to Mexico. It’s added several new lines that run through areas, adding a multitude of new products to ship.

What’s more, CP stock has a strong history of growth through stable investment and cost cutting. This strategy is the reason why they were able to purchase Kansas City in the first place. Yet despite hitting all-time highs of about $112, shares are now at 52-week lows.

That makes it a great time to pick up the stock for extra passive income. In fact, should shares reach 52-week highs quickly, here is what could happen to a $5,000 investment.

CP – now$9652$0.76$39.52quarterly$5,000
CP – highs$11252$0.76$39.52quarterly$5,824

Jumping back to those highs, you’ll have an extra $824 in returns and $39.52 in dividend income. That’s a total of $863.52 in passive income. So, don’t wait around! Get started earning tax-free income today.

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 positions in Canadian Pacific Railway. The Motley Fool recommends Canadian Pacific Kansas City. The Motley Fool has a disclosure policy.

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