Canadian pensioners want to get better returns on their savings without being bumped into a higher tax bracket or taking on on too much risk. At the same time, retirees who receive Old Age Security (OAS) pensions need to watch out for the OAS clawback.
Fortunately, pensioners can use their Tax-Free Savings Account (TFSA) to hold income investments that help meet these goals.
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TFSA limit
The TFSA contribution limit in 2024 is $7,000. This brings the cumulative maximum contribution space to $95,000 for a retiree. Unused contribution space can be carried forward indefinitely. Any money removed from the TFSA during the year will automatically open up equivalent new contribution room in the following calendar year, in addition to the regular annual TFSA limit.
Interest, dividends, and capital gains generated inside the TFSA are all tax-free and can be reinvested or removed as tax-free income. One popular strategy among pensioners who have to take payments from a Registered Retirement Income Fund (RRIF) is to put the cash they don’t need for living expenses into a TFSA.
OAS clawback
OAS recipients who have high total retirement income have to watch out for the OAS pension recovery tax. As soon as net world income hits a minimum threshold, a 15% OAS clawback is applied to every extra dollar. The income number to watch in the 2024 tax year is $90,997. For example, a pensioner with net world income of $110,997 in 2024 would see their total OAS get cut by $3,000 for the July 2025 to June 2026 payment period.
Retirement income of $90,000 sounds like a lot, but it is quite easy for a person to hit that level if they receive a decent work pension, CPP, OAS, and Registered Retirement Savings Plan withdrawals or RRIF payments. These are all taxable sources of income in addition to other income that might come from investments in taxable accounts. Once all the taxes are deducted, the amount available to spend still might make things a bit tight at the end of the month, especially if a retiree has a mortgage or pays high rent.
As such, it makes sense to hold income-generating investments inside a TFSA before investing inside a taxable account.
Good investments for TFSA passive income
Retirees who don’t want to take on any risk can still get good rates on Guaranteed Investment Certificates (GICs) offered by Canada Deposit Insurance Corporation members. Non-cashable GICs from some issuers currently pay more than 5% for a one-year term and above 4.5% for terms up to five years.
The downside of a non-cashable GIC is that the money is locked up for the term of the certificate, and the rate is fixed. In addition, it is possible that the renewal rates available when the GIC matures could be much lower.
Dividend stocks are another popular option for generating investment income. This might be a good choice for investors who are comfortable taking on some capital risk and might be interested in getting a better yield than what is offered on a GIC. Stocks also provide more flexibility as the shares can be sold at any time to access the funds in case of an emergency.
A number of TSX dividend-growth stocks trade at discounted prices right now and offer high dividend yields. Enbridge (TSX:ENB), for example, has increased the dividend annually in each of the past 29 years.
The stock currently trades near $50 per share compared to $59 at the peak in 2022. Enbridge has a $25 billion capital program on the go and continues to make strategic acquisitions to drive cash flow expansion that should support ongoing dividend increases. Investors who buy ENB stock at the current level can get a 7.3% dividend yield.
The bottom line on TFSA passive income
Retirees can quite easily put together a diversified portfolio of laddered GICs and high-yield dividend stocks to get an average yield of 5.5% right now. On a TFSA of $95,000, this would generate $5,225.00 per year in tax-free passive income that won’t put OAS at risk of a clawback.
