When investors think of retirement, they likely think first and foremost of the Registered Retirement Savings Plan (RRSP). Granted, this is absolutely an excellent way to create income that can be used during your retirement. And there are many benefits as to why investors would want to use it for investing today as well.
However, that doesn’t mean investors should forget to use their Tax-Free Savings Account (TFSA) in retirement as well. In fact, it has its own benefits that can help you create tax-free income that lasts.
Why the TFSA
Since being introduced in 2009, contribution limits have increased year after year. As of 2024, the total contribution limit a Canadian has access to is $95,000 as long as they were 18 when the TFSA was created in 2009.
This amount means Canadians have access to $95,000 of investment material. There are certainly ways to use this to your advantage, especially for tax-free income. For instance, one of the primary benefits of a TFSA is that investment growth within the account is tax-free. This means that any capital gains, dividends, or interest earned on investments held within the TFSA aren’t subject to taxes when withdrawn.
Furthermore, unlike the RRSP, the TFSA is more flexible. TFSA withdrawals are not taxed, and there are no restrictions on how the funds can be used. This flexibility makes TFSAs an attractive option for generating passive income in retirement, as investors can withdraw funds as needed without worrying about tax consequences.
What’s more, there are no age limits. Unlike the RRSP, there is no maximum age limit for contributing to a TFSA, and there are no mandatory withdrawals once you reach a certain age. This makes TFSAs well-suited for individuals who plan to continue investing and generating passive income in retirement.
What to consider
Now, let’s say you want to use the benefits of the TFSA for passive income in retirement. You want it more often than annually in that case. And that means it’s likely that even a Guaranteed Investment Certificate (GIC) isn’t going to cut it, even with super-high interest rates right now.
Instead, you could use a large part to put towards investments that provide you with long-term dividend income. In this case, even a stock with just a 5% dividend yield could create massive income.
A stock to get you there
Now, I would never recommend that an investor put all their money into one stock. But for the sake of this article, let’s say you were to use a company that has an average dividend yield over 5%. For this, I would consider Canadian Imperial Bank of Commerce (TSX:CM).
CIBC stock has a long history of dividend growth and payments, with a five-year average yield of 5.27% as of writing. Meanwhile, its dividend sits just a bit higher at 5.33%. And given that it’s a Big Six bank, you get access to the security that comes with the bank’s top three status. So, let’s say you were to put that $95,000 into CIBC stock on the TSX today, seeing it rise by its average of the last decade. That would create a compound annual growth rate (CAGR) of 3.4%.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | PORTFOLIO TOTAL |
| CM – now | $67.50 | 1,407 | $3.60 | $5,065.20 | quarterly | $95,000 |
| CM – 3.4% | $69.80 | 1,407 | $3.60 | $5,065.20 | quarterly | $98,208.60 |
If you can manage to find a dividend stock with at least a 5% dividend yield, you could create $5,065.20 in passive income like here with CIBC stock. Plus, an additional $3,208.60 in returns! Even with growth on the low side. So, consider this for some strong passive income in your TFSA.
