Do you want to earn $5,000 per year tax-free in your Tax-Free Savings Account (TFSA)?
It’s not easy, but it can be done.
If you’re 33 years old and have never contributed to a TFSA before, you have $95,000 worth of TFSA contribution room. “Contribution room” is the amount of contributions you can make and expect them to be exempt from taxation. It takes about a 5.3% yield to get to $5,000 per year in a $95,000 account. So, you do not need to push the boundaries of sanity with yield to get $5,000 coming into a TFSA each year. In this article, I will explore some ways that you can get there.
$5,000 per year: How to get there
There are two ways to get to $5,000 per year tax-free in your TFSA:
- Invest at a fairly high yield (5.3% to be exact) and start collecting $5,000 this year.
- Invest at the market yield and make recurring contributions into the future, until you hit 5.3%.
The former method could be achieved today, but you’ll need to research your stocks very carefully, as 5.3% is a higher yield than the TSX Index pays and thus can’t be achieved with a simple indexing strategy. It also requires you to be at least 33 years old. The latter method is safe and can be done with index funds, but it could have you waiting several years before you hit your $5,000 annual income goal. The TSX currently yields 3.3%, so you’ll only get $3,135 if you invest all your TFSA money into the index.
How much can you tax shelter
How much money you can tax shelter in a TFSA depends on three factors:
- Your age.
- How much you’ve already contributed to your TFSA.
- The returns you earned on amounts already contributed.
If you realized well above-average returns on TFSA investments made in the past, then it’s not inconceivable that you could have a $1 million TFSA balance. Otherwise, it all depends on how many years’ worth of annual contribution increases have accrued since your 18th birthday. The table below, courtesy of Tax Tips, shows how much room has accumulated per year since 2009.
Some good TFSA assets to hold
Now, we need to look at TFSA assets to hold. A good place to start is Guaranteed Investment Certificates (GICs). These days, they yield about 5%. You can get $4,750 per year holding 5% GICs in a $95,000 TFSA, which is pretty close to our $5,000 goal.
Another asset class you could look at is index funds. The broad market index funds don’t pay enough to get you to $5,000 per year with $95,000 invested, but you may be able to find sector funds or theme funds with 5.3% yields.
You could also look into individual stocks. Though they take more research than indexes, they sometimes provide superior results. Consider Canadian National Railway (TSX: CNR), for example. It’s a Canadian railroad stock that has easily beaten the TSX Index over the last 10 years. With only one major competitor, an indispensable role in North America’s economy, and a 35% net profit margin, it may continue outperforming.
CN Railway shares pay a dividend of $0.84 per quarter, or $3.36 per year. At today’s stock price of $165.66, those dividends yield 2.02%. To get to $5,000 at a 2.02% yield, you need to invest $247,524.75. See the table below for more details.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| CNR | $165.66 | 1,488 | $0.84 ($3.36 per year) | $1,249.9 ($4,999 per year) | Quarterly |
As you can see, it takes more than $95,000 invested in CNR stock today to get to $5,000 per year in dividend income. That means you can’t get $5,000 in an all-CNR TFSA portfolio today. However, the stock has a 10.5% compounded 10-year dividend-growth rate. If it can keep that up, the yield-on-cost will reach 5.3% at some point in the future.
