Pensioners and other passive-income investors are searching for ways to get better returns on their hard-earned savings without being bumped into a higher tax bracket or getting hit by a clawback on their Old Age Security (OAS) pensions. One strategy to achieve the goal involves holding income-generating investments inside a Tax-Free Savings Account (TFSA).
TFSA limit
Every year, Canadian residents aged 18 or older accumulate TFSA contribution space. The TFSA limit in 2024 will be $7,000. This is up from $6,500 in 2023. The government indexes the TFSA limit to inflation and makes increases in $500 increments. People who have qualified since the launch of the TFSA in 2009 now have as much as $88,000 in TFSA contribution room. This will increase to $95,000 in 2024.
Unused contribution space carries forward. In addition, any money removed from a TFSA during the year will open up equivalent new contribution space in the following calendar year.
Profits earned on investments held in a TFSA are not taxed, so the full amount of interest, dividends, and capital gains can go right into your pocket.
OAS clawback
Retirees who collect OAS need to keep an eye on their total annual taxable income. The Canada Revenue Agency implements a pension recovery tax on OAS payments when a person’s net world income tops a minimum threshold. The level for the 2023 income year is $86,912. Every dollar of net world income above this amount triggers a 15-cent reduction in the total OAS that will be paid in the July 2024 to June 2025 payment period. So, a person with a 2023 net world income of $96,912 would see their OAS get cut by $1,500 next year.
In 2024, the net world income threshold is expected to increase to $90,997.
It makes sense for retirees to take full advantage of their TFSA contribution space and hold income-generating investments inside a TFSA to reduce their taxable income. Company pensions, Canada Pension Plan, OAS, RRSP withdrawals, Registered Retirement Income Fund (RRIF) payments, and income from investments held in taxable accounts all count toward the net world income calculation.
Best investments for TFSA passive income
The rates investors can get from Guaranteed Investment Certificates (GICs) soared in the past two years but have likely peaked and are now falling. That being said, investors can still find non-cashable GIC rates above 5% for terms up to two years, depending on the issuer, and rates above 4.5% for longer commitments.
Dividend stocks have started to recover from a meaningful pullback, but many top dividend-growth companies still offer high yields.
Enbridge (TSX:ENB), for example, has increased its dividend annually for the past 29 years. The company continues to grow through acquisitions and capital projects and expects to deliver increased distributable cash flow in the coming years.
ENB stock trades near $47 per share at the time of writing compared to $59 at the high point in 2022. Investors who buy the stock at the current level can get a dividend yield of about 7.75%.
The bottom line on tax-free passive income
Investors can still put together a diversified TFSA portfolio of GICs and high-yield dividend stocks to get an average yield of 6%. On a $95,000 TFSA in 2024, this would generate an annual income of $5,700 that won’t push you into a higher tax bracket or put OAS at risk of a clawback.
