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

This strategy can help boost passive income and reduce portfolio risk.

| More on:
Person holds banknotes of Canadian dollars

Source: Getty Images

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.

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 Any funds withdrawn from a TFSA will open up equivalent new contribution room in the following calendar year in addition to the regular TFSA limit.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.

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 Retirement

financial freedom sign
Retirement

Want $1 Million in Retirement? Invest $10,000 in These 3 Stocks and Wait a Decade

What would it take to convert $10,000 into $1 million? Let’s do the math and see stocks that have the…

Read more »

edit Balloon shaped as a heart
Retirement

3 Stocks Retirees Should Absolutely Love

These three dividend stocks are perfect for retirees wanting not just income, but growth in shares for the foreseeable future.

Read more »

Close up of an egg in a nest of twigs on grass with RRSP written on it symbolizing a RRSP contribution.
Dividend Stocks

2 Top Canadian Dividend Stocks for RRSP Investors 

No matter how much you save, you may wonder if it is enough to retire. These dividend stocks can give…

Read more »

Increasing yield
Retirement

3 High-Yield Dividend Stocks for Retirees

Top TSX dividend stocks are on sale.

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Retirement

We’re Only Getting Older: A Top TSX Stock That Benefits From an Aging Population

Here's why Chartwell Retirement Residences (TSX:CSH.UN) could be a successful turnaround story to invest in as Canadian grow older

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Retirement

Retirees: What Is the CPP Enhancement and How Does it Work?

The CPP enhancement will increase your pension payout in retirement. But you still need other income sources to supplement the…

Read more »

Path to retirement
Retirement

Invest in These TFSA Stocks to Sail Into a Serene Retirement

Is your TFSA set for safety or growth? Having these solid TFSA stocks provides a blend of both.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Retirement

TFSA: 2 Canadian Dividend Stocks to Buy for a Self-Directed Retirement Portfolio

Top TSX dividend stocks look oversold and offer attractive yields.

Read more »