Canadian seniors don’t have many options available to increase their income without being hit by higher taxes. Fortunately, investors can take advantage of their Tax-Free Savings Account (TFSA) contribution space to generate passive income that won’t push them into a higher marginal tax bracket or put Old Age Security (OAS) at risk of a clawback.
TFSA limit in 2024
Retirees get to put another $7,000 into their TFSA in 2024. The limit increased by $500 from 2023 due to indexing to the rate of inflation. The new limit gives each person a cumulative maximum TFSA contribution space of $95,000 in 2024. That means retired couples have as much as $190,000 in combined TFSA investment space that can generate tax-free passive income.
It is important to note that any interest, dividends, or capital gains that are removed from the TFSA will open up equivalent new contribution space in the following calendar year in addition to the regular TFSA limit. That’s helpful for retirees who might need to pull out a large chunk of cash during the year for a trip or an emergency expense but will have new cash available in the following year to replace the withdrawal. For example, the extra funds could come from the sale of an asset or payments from a Registered Retirement Income Fund (RRIF).
OAS pension recovery tax
It makes sense to minimize or avoid the OAS clawback, when possible. The CRA implements the OAS pension recovery tax when net world income breaches a minimum threshold. In the 2024 income year, this amount will be $90,997. Every dollar above this level triggers a clawback of 15 cents on the total OAS that will be paid in the July 2024 to June 2025 payment timeframe. For example, a person with net world income of $100,997 in 2024 would see their OAS cut by $1,500 in the following year.
People who have generous company pensions and receive maximum CPP and OAS, along with other taxable sources of income, can quite easily hit the $91,000 level during the year. This is decent income for a retiree, but a good chunk of it goes to the tax authorities, so it is best to keep as much as possible in your pocket.
Switching income-generating investments from taxable accounts into a TFSA, if you have TFSA contribution space available, is a good way to reduce the tax hit.
GICs or dividend stocks
Retirees who want safe investments and decent returns should consider holding Guaranteed Investment Certificates (GICs) inside their TFSA. GIC rates from insured providers soared as high as 6% this year. They have since dropped, but savers can still get non-cashable GIC rates in the 4-5% range, depending on the term.
Pensioners who can tolerate some capital risk in their portfolios might want to consider top TSX dividend stocks to boost their returns. A number of Canadian companies with long track records of dividend growth now offer high yields due to the pullback in their share prices this year.
BCE (TSX:BCE) is a good example of a top dividend stock that looks oversold today. The communications giant trades for close to $51.50 at the time of writing compared to $65 earlier this year.
BCE has increased its dividend by at least 5% in each of the past 15 years. There is no guarantee the trend will continue, but the payout should be safe. At the current share price, BCE stock provides a yield of 7.5%.
The bottom line on TFSA passive income
A diversified portfolio of laddered GICs and top high-yield dividend stocks could easily generate an average return of 5.5% right now. This would generate a total of $10,450 per year in tax-free passive income for a retired couple with combined TFSA investments of $190,000 in 2024.
