How to Use Your TFSA to Earn $12,000 Per Year in Tax-Free Income

A Tax-Free Savings Account (TFSA) can be your secret side hustle without ever leaving the couch! By regularly investing in dividend stocks or growth-focused exchange-traded funds (ETF), you let your money grow and generate income — all tax-free! Over time, the returns from your investments could potentially rival the earnings from a part-time job, but without the extra hours. It’s like having your money work for you while you enjoy more free time! So, how to get started?

Consider an ETF

Investing in a safe ETF could be a fantastic way to build a part-time income through your TFSA without the stress of stock-picking. Many ETFs track reliable sectors or indices, like the S&P/TSX 60, which has historically delivered average annual returns of around 7-8%. If you invest $10,000 in a well-diversified ETF with a 7% return, your money could double in about 10 years. And all your gains would be tax-free thanks to the TFSA. Over time, the compounding effect can significantly boost your returns, thereby leading to potential yearly payouts that rival part-time earnings.

For example, if you build a portfolio of dividend-focused ETFs with a 4% annual yield, $100,000 invested could generate around $4,000 per year in tax-free income. Now, in this case, of course, you’d have to wait for the contribution limit to rise. But it should reach it by next year.

Still, that’s like earning an extra $333 a month, the equivalent of working 20 hours a month at $16.50 an hour, but with no time commitment! Plus, by reinvesting dividends or continuing to add to your ETF holdings, you can grow this income stream even further, potentially replacing the need for a part-time job altogether.

The JEPI ETF

JPMorgan Equity Premium Income ETF (TSX:JEPI) on the TSX is a fantastic choice for anyone looking to generate safe, consistent income within a TFSA. Backed by J.P. Morgan Asset Management, which manages a whopping US$3.3 trillion globally, JEPI focuses on U.S. stocks, particularly those in the S&P 500. It combines high-quality equity investments with an options strategy that generates extra income by selling out-of-the-money call options. This means you get a steady income stream from both dividends and options premiums, thereby making it a solid option for income-focused investors seeking lower volatility in their portfolio.

JEPI is designed to deliver much of the S&P 500’s returns but with less risk, thanks to its built-in downside protection from its covered call strategy. For example, if you have $100,000 invested, the potential income generated from dividends and options premiums could easily rival what you’d make in a part-time job, but without the extra hours! Given its balanced approach between growth and income and the expertise of J.P. Morgan’s team, JEPI could be a powerful tool in transforming your TFSA into a steady source of passive income.

Bottom line

So, let’s say you took that $100,000 and put it into JEPI. You then see it rise by that 12%, giving it a bit of room to rise from the 8% mentioned earlier. Plus, the stock has yet to announce dividends, but it looks as though it will be distributing them just as its U.S. counterpart has. Here’s what that investment alone could look like without dividends.

As you can see, your shares could rise to $12,000 in just a year — never mind the yet-to-be-announced dividend from JEPI ETF. In time, you could certainly create an investment portfolio that will act like a part-time job — all tax-free in a TFSA!