Canadian savers are searching for ways to get better returns on their investments without having to pay additional taxes. One strategy to achieve this goal involves holding income-generating investments inside a Tax-Free Savings Account (TFSA).
TFSA limit 2024
The TFSA limit will be $7,000 in 2024. This is an increase of $500 from 2023 and will raise the cumulative maximum contribution space per person from $88,000 in 2023 to $95,000.
Retirees and other investors can use their TFSA contribution space to build portfolios of investments that generate reliable passive income without worrying about getting bumped into a higher tax bracket or putting Old Age Security (OAS) payments at risk of a clawback.
All interest, dividends, and capital gains generated inside the TFSA remain tax-free and can be pulled from the account at any time. Funds removed from the TFSA automatically open up equivalent new contribution space in the following calendar year in addition to the regular TFSA limit.
Best TFSA investments for passive income
The surge in interest rates over the past 18 months has driven up the rates offered on Guaranteed Investment Certificates (GICs). This is good news for pensioners and other investors who want to get decent returns on no-risk products. The invested funds are insured as long as the GIC is issued by a Canada Deposit Insurance Corporation (CDIC) member, and the value is within the $100,000 limit. At the time of writing, investors can get non-cashable GICs that pay between 5% and 6%, depending on the term.
Dividend stocks have taken a beating as interest rates increased. This is frustrating for long-term holders of these stocks who might need to sell before the next bounce, but new buyers now have an opportunity to acquire some top TSX dividend-growth stocks offering high yields. Enbridge (TSX:ENB), for example, has increased its dividend for 28 consecutive years.
The company’s assets are performing well and should deliver steady revenue and cash flow growth in the coming years. At the time of writing, investors can get a 7.7% dividend yield from ENB stock.
The Bank of Canada is likely done raising rates, so the peak could be in sight for GIC returns, while top Canadian dividend stocks probably have limited additional downside.
The bottom line on TFSA passive income
Investors can quite easily put together a diversified portfolio of laddered GICs and top dividend-growth stocks to get an average yield of 6.25% right now. On a TFSA currently maximized at $88,000, this would generate $5,500 per year in tax-free passive income.
