Retirees and other TSX income investors can take advantage of the decline in the share prices of some of Canada’s top dividend stocks to generate high yields inside a self-directed Tax-Free Savings Account (TFSA) today.
Source: Getty Images
TFSA limit
The TFSA limit in 2024 is $7,000. This brings the cumulative maximum TFSA contribution room to $95,000 per person since the TFSA’s inception in 2009 for those who were 18 years old at the time. The size of the annual TFSA limit is indexed to inflation, with increases made in $500 increments.
All interest, dividends, and capital gains earned inside a TFSA are tax-free. This means the full value of gains can be reinvested or removed to use as tax-free income. Any funds withdrawn from a TFSA will open up equivalent new contribution room in the following calendar year in addition to the regular TFSA limit.
OAS clawback
Retirees who receive Old Age Security (OAS) need to keep an eye on their total annual taxable income that comes from sources like company pensions, Canada Pension Plan (CPP), OAS, Registered Retirement Savings Plan (RRSP) withdrawals, or Registered Retirement Income Fund (RRIF) payments. When net world income tops a minimum threshold, the Canada Revenue Agency (CRA) implements clawback on OAS payments. The OAS clawback is 15 cents on every dollar of net world income above the limit. The number to watch in the 2024 income year is $90,997.
One way to reduce or avoid the OAS clawback is to use the full TFSA contribution room to hold income-generating investments before owning investments in a taxable account.
Good TFSA investments for passive income
Investors have an opportunity right now to get high rates on Guaranteed Investment Certificates (GICs) and high yields on top dividend-growth stocks.
GIC rates are coming down now that the Bank of Canada has started to cut interest rates, but investors can still get GIC rates above 4%. This is a risk-free way to generate returns in a TFSA.
Investors who need higher returns and can handle some volatility can currently get attractive dividend yields from top TSX dividend-growth stocks. Enbridge (TSX:ENB), for example, provides a 7.6% dividend yield at the time of writing.
The stock trades near $48 per share compared to $59 at the 2022 high. Enbridge has increased the dividend for 29 consecutive years and more hikes should be on the way, supported by the $25 billion capital program and the impact of acquisitions.
The bottom line TFSA passive income
TFSA investors can quite easily put together a diversified portfolio of GICs and top dividend-growth stocks to get an average return of 5% right now. On a TFSA 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 at risk of a clawback.
