How to Use Your TFSA to Earn $3,600 Per Year in Passive Income

This Canadian dividend ETF pays monthly and is an excellent way to program your TFSA for passive income.

Tony Dong, MSc, CETF®

Tony turned a series of 2017 marijuana stock losses into a freelance career advocating for ETF investing. He currently holds a Master’s in Risk Management from Columbia University and is a Certified ETF Advisor (CETF®). Tony is the founder of ETF Portfolio Blueprint (etfportfolioblueprint.com) and the Lead ETF Analyst for ETF Central, a partnership between Trackinsight and the NYSE. His analysis has also been featured in publications like Kiplinger, 24/7 Wall St., U.S. News & World Report, TheStreet, and Benzinga.

Published September 27, 2024 9:15 pm EDT

Imagine transforming your Tax-Free Savings Account (TFSA) into a powerhouse that cranks out passive income month after month.

Yes, the TFSA isn’t just for stashing cash; it’s a dynamic tool that can grow your wealth through investments, and best of all, the gains are tax-free.

Whether it’s covering your monthly phone bill, paying down your car insurance, or just accumulating savings for a rainy day, the income you can generate from a well-structured TFSA can make a tangible difference in your financial life.

Let’s explore how you can start turning your TFSA into a passive-income-generating machine — targeting $4,600 a year, or $300 per month.

Piggy bank with word TFSA for tax-free savings accounts. — Source: Getty Images

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Buy the right ETF

It’s not just individual stocks that can generate income—there are many types of assets that can pay you regularly. That’s why I like BMO Monthly Income ETF (TSX:ZMI).

It’s a fund of funds, meaning it holds numerous other BMO ETFs that give you access to the following income-generating assets:

Corporate bonds: Essentially loans to companies that pay you interest regularly and your principal back at maturity.
U.S., Canadian, and international dividend stocks: Stocks that consistently pay out a portion of their earnings.
Preferred shares: Similar to bonds, preferred shares offer fixed dividend payments but come with limited upside potential like stocks.
Covered calls and cash-secured puts: Options strategies designed to generate income, with covered calls earning you premiums from selling the right to buy shares you own at a specified price within a certain period. Cash-secured puts involve selling put options with enough cash set aside to purchase the stock if the option is exercised, earning income from the premiums received for selling the puts.

I like ZMI because it’s essentially a complete income portfolio in a single ticker. Currently, it’s paying a solid 4.91% distribution yield, with a very reasonable 0.2% expense ratio.

How much do you need to invest?

Assuming ZMI’s most recent September 4th monthly distribution of $0.07 and a share price of $17.19 as of September 12, remained consistent moving forward, an investor using a TFSA would need to buy roughly $73,676.34 worth of ZMI, corresponding to 4,286 shares to receive around $300 monthly tax-free.