Canadian savers are searching for ways to get better returns on their money without being hit with a higher tax bill. One popular strategy to boost passive income is to hold high-yield investments inside a self-directed Tax-Free Savings Account (TFSA).
TFSA limit increase for 2024
The TFSA limit in 2024 will be $7,000 compared to $6,500 in 2023. This is good news for retirees and other investors who use their TFSA to generate tax-free passive income from their savings. The TFSA limit is indexed to inflation, and increases are made in increments of $500.
Unused contribution room can be carried forward to future years. In 2023, the cumulative maximum contribution space per person was $88,000. That will jump to $95,000 in 2024. Seniors with high levels of savings should consider using up their full TFSA room before making income-generating investments inside taxable accounts. All interest, dividends, and capital gains generated inside a TFSA can go straight into your pocket. The Canada Revenue Agency does not take a slice of the profits and won’t count the TFSA earnings towards the net world income calculation used to determine the Old Age Security (OAS) clawback that kicks in at a minimum threshold. This amount is expected to be $90,997 in the 2024 income year.
Money taken out of a TFSA will automatically open up equivalent new contribution space in the following calendar year. When you have cash sitting in a TFSA that you plan to withdraw and spend in the early part of the following year, it makes sense to pull it out before the end of December.
Good investments for passive income
Rates on Guaranteed Investment Certificates (GICs) soared as high as 6% in 2023. The rally in the bond market that has occurred in the past couple of months has led to a sharp drop in GIC rates, but investors can still get 5% for a one-year non-cashable GIC from some insured providers and better than 4% for multi-year commitments. These are decent no-risk returns.
Dividend yields rose sharply through much of this year as share prices in top TSX dividend stocks dropped. The rebound in share prices over the past several weeks, however, has driven yields down in some sectors, and that trend could continue into 2024 if bond yields continue to slide on anticipated cuts to interest rates. Fortunately, investors who missed the bounce can still buy good dividend-growth stocks at discounted prices to get high yields.
Telus (TSX:T), for example, trades for close to $23 at the time of writing compared to $34 at the peak in 2022.
The drop is due to revenue challenges faced by Telus International and the impact of higher interest rates on borrowing costs. Despite these issues, Telus still expects consolidated revenue to grow by nearly 10% in 2022, and earnings before interest, taxes, depreciation, and amortization should increase compared to last year. As such, the dividend should be safe. Telus has increased the distribution annually for more than two decades. At the current share price, investors can get a yield that is close to 6.5%.
Other top TSX dividend stocks are also trading at discounted prices and now offer dividend yields above 7%.
The bottom line on TFSA passive income
Investors can quite easily put together a portfolio of GICs and top dividend-growth stocks to get an average yield of 5.5% today. On a TFSA of just $40,000, this would generate $2,200 per year in tax-free passive income!
