New Investors: How to Use a TFSA to Earn $4,750 Per Year in Tax-Free Passive Income

Here are top investments for TFSA passive income.

| More on:
TFSA and coins

Image source: Getty Images

Canadians investors are using their self-directed Tax-Free Saving Account (TFSA) to generate tax-free passive income on their hard-earned savings. Current market conditions offer an opportunity for investors to get great returns from both Guaranteed Investment Certificates (GICs) and high-yield TSX dividend stocks.

TFSA limit

The Canadian government created the TFSA in 2009 as an alternative tool for people to put money aside to meet future financial goals. The TFSA limit increases every year. In 2024 the TFSA limit increased to $7,000. This brings the maximum cumulative total contribution space to $95,000 per person.

All interest, dividends, and capital gains earned inside the TFSA are tax-free and can go straight into your pocket or be reinvested to build the savings fund. This is great news for anyone who is in a high marginal tax bracket and would otherwise be hit with taxes on the earnings if the investments were held in a taxable account.

The flexibility of the TFSA is also attractive. Money can be removed at any time for an emergency. All withdrawals in a calendar year open up equivalent new TFSA contribution space in the following year.

Seniors get an added benefit. The TFSA income is not counted toward the Canada Revenue Agency’s net world income calculation that is used to determine the Old Age Security (OAS) pension recovery tax, also known as the OAS clawback.

Retirees who collect OAS have to keep an eye on their total taxable income coming from company pensions, OAS, Canada Pension Plan, Registered Retirement Income Fund payments, Registered Retirement Savings Plan withdrawals, and taxable investments, among other sources. In the 2024 income year, the number to watch is $90,997. 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 2025 to June 2026 payment period. For example, a person with a net world income of $100,997 in 2024 would see their OAS clawed back by $1,500 in the next fiscal payment year.

This is why it normally makes sense for investors to maximize TFSA contributions before owning income-generating investments inside a taxable account.

TFSA investments for generating passive income

Investors who don’t want to take any risks can simply hold GICs inside the TFSA. Rates paid on GICs have come down in recent months, but investors can still get between 4% and 5% depending on the issuer and the duration of the GIC.

People who can handle some market turbulence and are seeking higher yields have an opportunity to buy some top TSX dividend-growth stocks at discounted prices right now.

Enbridge

Enbridge (TSX:ENB) is a good example of a high-yield dividend stock with a great track record of distribution growth. The board has increased the dividend annually for the past 29 years.

Enbridge is a giant in the energy infrastructure sector moving 30% of the oil produced in Canada and the United States. The company also has natural gas transmission and distribution assets, including utilities that generate steady cash flow. In addition, Enbridge is expanding its export holdings and continues to grow its renewable energy business.

Investors who buy Enbridge at the current price near $48 can get a 7.6% dividend yield. ENB stock was as high as $59 in 2022.

The bottom line on TFSA passive income

A diversified portfolio of GICs and top TSX dividend stocks could easily deliver an average yield of 5% today. On a TFSA portfolio of $95,000, this would generate $4,750 per year in tax-free passive income that won’t bump you into a higher tax bracket or put OAS payments 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 Enbridge. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Enbridge.

More on Dividend Stocks

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Dividend Stocks

This 8% Dividend Stock Pays Cash Every Month

Earn monthly cash of $154 with this 8% dividend stock.

Read more »

oil tank at night
Dividend Stocks

Think Oil Is Going Higher? 3 Dividend Stocks to Buy Now

Looking for steady dividend growth? These three Canadian oil stocks could provide substantial dividend income in the coming years.

Read more »

Profit dial turned up to maximum
Dividend Stocks

This 7% Dividend Stock on the TSX is Worth Watching

With this superb TSX stock now trading at the bottom of its 52-week range, it's certainly a dividend stock you'll…

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

2 TSX Dividend Stocks to Buy While They Still Offer Great Yields

These top dividend-growth stocks now offer 7% dividend yields.

Read more »

Dots over the earth connecting the world
Dividend Stocks

1 Magnificent Dividend Stock Down 23% to Buy Right Now Near a Once-in-a-Decade Valuation

Patient investors could be happy with this dividend stock a few years down the road.

Read more »

Human Hand Placing A Coin On Increasing Coin Stacks In Front Of House
Dividend Stocks

Best Stocks to Buy in May 2024: TSX Real Estate Sector

Besides yielding stable monthly passive income, these top TSX real estate stocks could help you earn high returns on your…

Read more »

exchange-traded funds
Dividend Stocks

These 2 Dividend ETFs Are a Retiree’s Best Friend

Retirees looking for steady income will love these two Canadian dividend ETFs

Read more »

Bad apple with good apples
Dividend Stocks

Safe and Sound Stocks for Canadians: My Top 5 Choices

Want some of the best stocks for Canadians right now? Here's my top 5 list of stocks to buy today…

Read more »