Inflation might be slowing, but that just means life is getting more expensive every month at a slower pace compared to last year. This presents a challenge for people who need to boost their income to cover higher living costs without getting hit with a bigger tax bill.
One strategy to increase returns on savings to help offset the budget jump in 2024 is to hold income-generating investments inside a Tax-Free Savings Account (TFSA).
Any income that is generated inside a TFSA is beyond the reach of the Canada Revenue Agency (CRA) and can go straight into your pocket. This helps everyone, but seniors who collect Old Age Security (OAS) get an added benefit. The TFSA earnings are not counted toward the CRA’s net world income calculation used to determine the OAS clawback.
In the 2023 income year, for example, every dollar of net world income above $86,912 will result in a 15-cent cut to the total OAS received in the July 2024 to June 2025 payment period. If possible, it makes sense to earn investment income inside a TFSA rather than in a taxable trading account.
The TFSA limit in 2024 will be $7,000. This is an increase of $500 from 2023 and will bring the cumulative maximum contribution space per person to $95,000. Everyone has a different level of savings, but the TFSA gives Canadians an opportunity to earn some tax-free income to help pay the bills.
Dividend stocks or GICs?
Canadian dividend stocks have been moving higher over the past two months after a steep slide that pushed the share prices of many top TSX dividend payers to oversold levels. Savvy investors who managed to buy at the bottom are already sitting on nice gains and locked in great dividend yields. Investors who missed the bounce can still find undervalued stocks that offer high yields and strong track records of dividend growth.
Enbridge (TSX:ENB) just raised its dividend for the 29th consecutive year. The stock offers a 7.75% dividend yield at the current price.
BCE (TSX:BCE) still looks cheap and now provides a dividend yield of 7.5%. The communications giant has increased the dividend by at least 5% in each of the past 15 years.
Rates paid on Guaranteed Investment Certificates (GICs) rose as high as 6% this year but are moving lower as bond yields fall on the anticipation of interest rate cuts in 2024. Investors can still get non-cashable GIC rates above 5% from some Canada Deposit Insurance Corporation (CDIC) members. The downside of a GIC is that the invested money is not available during the GIC term, and the rate of return is fixed. However, insured GICs are 100% safe, whereas stock prices can fall below the purchase price, and dividends sometimes get cut.
The right mix of dividend stocks and GICs depends on the desired return, the need for access to the cash, and the person’s risk tolerance.
The bottom line on TFSA passive income
It is possible to put together a diversified portfolio of GICs and high-yield dividend stocks to get an average yield of 6% right now. On a TFSA of just $30,000, this would generate $1,800 in tax-free income next year that won’t bump you into a higher tax bracket or put OAS at risk of a clawback.