How to Use Your TFSA to Earn $615.48 Per Year in Tax-Free Income

The TFSA is so much better than any side hustle you could imagine, because of one thing: it takes pretty much no hustle!

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published August 27, 2024 8:00 pm EDT

When it comes to building wealth, side hustles often get a lot of attention. However, these might not be as effective as consistent Tax-Free Savings Account (TSFA) investing. For instance, while a side hustle might bring in an extra $500 a month, investing that amount into a TFSA over 20 years, with a modest annual return of 6%, could grow to around $230,000, thanks to the magic of compound interest.

Moreover, managing a side hustle can be time-consuming and stressful. Meanwhile, TFSA investing requires minimal effort once set up. Over the long term, the power of tax-free compounding within a TFSA can outpace the irregular and often taxed income from side hustles, making it a more reliable path to financial growth.

Why a TFSA works

A TFSA is like the Swiss Army knife of passive income strategies. You can use it to invest in a variety of assets, like dividend-paying stocks, bonds, or exchange-traded funds (ETF), that generate income over time. The best part? All the growth and income you earn in a TFSA are tax-free. This means you get to keep every penny of your earnings without worrying about the taxman taking a slice.

Another reason a TFSA is great for passive income is its flexibility. You can withdraw money anytime without penalties. This makes it easy to access your funds when needed. Plus, any amount you withdraw is added back to your contribution room the following year. So, you never lose the ability to keep growing your tax-free income. It’s a straightforward, no-fuss way to build and enjoy your passive-income stream.

Some hidden secrets

The TFSA has a few hidden gems that can really help you supercharge your passive income. First off, did you know that you can carry forward unused contribution room? If you haven’t maxed out your TFSA in previous years, you can catch up whenever you’re ready. This means you can invest a lump sum when you have the funds, giving your money more time to grow tax-free and generate that sweet passive income.

Another cool fact is that the income you earn in your TFSA doesn’t affect your eligibility for government benefits like Old Age Security. Since TFSA withdrawals aren’t considered taxable income, you can earn as much passive income as you like without worrying about clawbacks. This makes the TFSA a stealthy tool for boosting your retirement income while keeping your benefits intact.

Make even more

If you’re considering boosting your TFSA with some steady passive income, Timbercreek Financial (TSX: TF) on the TSX is definitely worth a look. This company specializes in providing structured financing solutions for commercial real estate. That might sound complicated, but it boils down to consistent returns for investors. With a forward annual dividend yield of around 8.79% as of writing, TF offers a solid stream of income that can make your TFSA work harder for you. Plus, with a payout ratio that indicates they’re comfortably covering dividends, you can feel more secure about those payments sticking around.

What makes TF particularly appealing for TFSA investors is its focus on stability. Timbercreek Financial’s portfolio is largely made up of first mortgages on income-producing properties with a conservative loan-to-value ratio. This means they’re lending against properties that generate cash flow, reducing risk while still delivering solid returns. And given the company’s strategy of redeploying capital into high-quality loans, it seems well-positioned to keep delivering strong results even in a changing market. All in all, TF offers a compelling combination of income and security. Ideal for long-term, tax-free growth in your TFSA.

Bottom line

So, let’s say you just started out with that $7,000 in contribution room from 2024. Here is what that could earn you from today’s dividend yield from Timbercreek Financial in your TFSA.

COMPANY	RECENT PRICE	NUMBER OF SHARES	DIVIDEND	TOTAL PAYOUT	FREQUENCY	PORTFOLIO TOTAL
TF	$7.85	892	$0.69	$615.48	monthly	$7,000

That’s right; investors could earn $615.48 in earnings every year through dividends alone. That comes out to $51.29 each and every month! And that’s without the stress that comes with a side hustle. So, get started and start compounding!