Between the Old Age Security (OAS) and the Canada Pension Plan (CPP), Canadian retirees can get a lot of help for their retirement income. However, these pension programs are designed to cover only about a third of the income Canadians might need in retirement. With a sound retirement plan, you must set yourself up with passive-income streams to supplement your pension.
For Canadians, there is no shortage of ways to set up passive income streams for this purpose. Stock market investing, when done right, can be an excellent way to achieve your retirement income goals.
By building a portfolio of reliable dividend stocks, you can generate enough passive income to handle your expenses in style. If you use your Tax-Free Savings Account (TFSA) properly, that retirement income can line your account balance with cash that the Canada Revenue Agency (CRA) cannot touch.
Today, we will discuss how you can hypothetically generate significant and tax-free passive income through dividend investing in a TFSA.
TFSA 101
The TFSA limit for 2023 is $6,500, making the cumulative total contribution room $88,000 for anyone who has qualified since its launch in 2009. Any profits generated within a TFSA can grow your account balance without incurring income taxes.
Additionally, withdrawals from a TFSA are tax-free and open up equivalent contribution space in the following calendar year atop the regular limit increase. However, exceeding the contribution room can make the account lose its tax-sheltered status.
That said, there are ways to maximize the use of a TFSA’s tax-sheltered status to grow your wealth faster and build a portfolio fit for a king. Dividend investing and using the power of compounding is one such way to go.
Dividend investing in a TFSA
Provided you do not exceed your annual contribution room, the Canada Revenue Agency (CRA) cannot touch profits from your investments held in a TFSA. Mind you, dividend investing has its risks. Share prices of invested stock can decline when the market is volatile or the underlying business is in trouble.
Fortunately, building a portfolio of reliable dividend stocks and growing it in the TFSA through the power of compounding can help you mitigate share price volatility risk and keep growing your account balance.
While you cannot contribute more than your limit allows, there is nothing against investments held in the account growing beyond it within the TFSA.
By creating a portfolio of reliable dividend stocks and reinvesting returns to purchase even more shares, you can exponentially grow your TFSA’s value. When your portfolio grows large enough, you can begin withdrawing the cash from dividends in your TFSA to supplement your pension income.
Good examples of excellent dividend stocks offering safe-yielding payouts include TFI International stock, Intact Financial stock, and National Bank of Canada stock.
Foolish takeaway
Just as Rome wasn’t built in a day, building a passive-income portfolio large enough to supplement your pension successfully will take patience, careful planning, and a well-balanced portfolio.
By carefully picking and choosing dividend stocks with the potential to deliver returns for decades without breaking their streaks, you can set yourself up to generate a substantial and tax-free passive income for a more comfortable retired life.
