Retirement Income: How to Earn $4,750 Per Year Tax-Free in a TFSA

Retirees can use this strategy to boost income and reduce risk.

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Canadian seniors are searching for ways to boost their retirement income without getting bumped into a higher tax bracket or being hit with a clawback on their Old Age Security (OAS) pensions. One popular strategy to achieve this goal is to hold income-generating investments inside a Tax-Free Savings Account (TFSA).

TFSA limit 2024

The TFSA contribution limit is $7,000 in 2024. That’s up from $6,500 in 2023 and brings the cumulative maximum contribution space to $95,000 per person. A retired couple would have as much as $190,000 in TFSA room to hold dividend stocks and Guaranteed Investment Certificates (GIC) that can generate tax-free passive income.

OAS Clawback

The TFSA is great for investors of all ages, but retirees who get OAS and have high pension earnings can really benefit by receiving income from a TFSA rather than holding investments in taxable accounts. The Canada Revenue Agency implements an OAS pension recovery tax of 15% on net world income that tops a minimum threshold.

In the 2024 income year, the number to watch is $90,997. Every dollar of net world income above that amount triggers a 15-cent clawback on the total OAS payments that will be made in the July 2025 to June 2026 period. As an example, a person with a net world income of $100,997 this year would see their OAS reduced by $1,500 in the 2025 to 2026 payment segment. That’s a big hit that should be avoided, if possible.

TFSA investments for passive income

GIC rates have dropped about 1% over the past few months as a result of a plunge in bond yields. Investors have started to bet on interest rate cuts by the Bank of Canada before the end of the year, and that is pushing up bond prices, which results in lower bond yields. At the peak, GIC rates got as high as 6% in the fall. A one-year GIC from insured providers is still above 5% in some cases, and multi-year GIC rates are above 4%. This is still a decent return, and holding GICs as part of a balanced portfolio helps offset the risk associated with owning stocks.

Top TSX dividend stocks rallied off their lows through the last quarter of 2023, but many still trade at discounted prices and offer attractive yields.

Enbridge

Enbridge (TSX:ENB), for example, trades near $48.50 at the time of writing compared to $43 in early October, but it is still down from the $59 it reached in 2022, so there is decent upside potential on a continued recovery.

Enbridge has increased the dividend for 29 consecutive years. Investors who buy ENB stock at the current level can get a 7.6% dividend yield.

A number of other good TSX dividend-growth stocks also look cheap right now and offer yields in the 6% to 7% range, including BCE and Bank of Nova Scotia.

The bottom line on TFSA passive income

Retirees can quite easily put together a diversified portfolio of GICs and top Canadian dividend stocks to get an average yield of 5% right now. In a TFSA of $95,000, this would generate $4,750 in annual tax-free passive income that won’t put your OAS at risk of a clawback.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Bank Of Nova Scotia and Enbridge. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Enbridge and BCE.

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